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The Trouble With Yoox Net-a-Porter

Is Yoox Net-a-Porter still the optimal solution for either brands or consumers? We fear not.
Yoox Net-a-Porter Group | Source: Courtesy
By
  • Luca Solca,
  • Simon Bowler

LONDON, United Kingdom — During all the years that we have been researching and writing about the luxury and retail industries, the biggest and potentially the most disruptive change has been the rise of online shopping. Yet compared to other market segments, luxury is still relatively underdeveloped on the internet. Historically, this is rooted in a deep fear that, by selling online, luxury brands would risk debasing their exclusive image. Consumers, for their part, have traditionally been wary of spending large sums on items they can't touch or try on; online, they also forgo the experiential value of visiting a temple-like luxury flagship.

But both factors are changing fast. Luxury brands and consumers alike are rapidly embracing e-commerce and we see the luxury industry’s penetration of the online market doubling within the next five years.

This presents a big opportunity, but also a big challenge for the Yoox Net-a-Porter Group, the world’s largest luxury e-commerce platform following the merger of Yoox and Net-a-Porter in 2015. The company’s main banners may well have all bases covered, with Net-a-Porter serving the in-season, full price market and Yoox targeting the off-season side. But by now the big luxury brands have learned their lesson and are putting more and more resource and attention into developing their own online operations. At the same time, in such an attractive market, newcomers with new business models are bound to emerge. This is what we are seeing today.

Yoox looks to have the best model among online clearance platforms. Giving product a life at a second price point, Yoox has built its customer following on the back of its product quality. For brands, this protects pricing integrity to a greater extent than many of Yoox’s peers, in particular companies operating flash-sales models that offer large headline discounts on recommended retail prices. Nonetheless, there is a risk that luxury brands decide to move away from the more visible online off-price channel and manage their own discounting.

Net-a-Porter’s full-price aggregator model looks more sustainable. In-season sales are split between those made directly through the e-commerce platforms of the brands and those made by brand aggregators, both multi-channel (e.g., department stores) and pure-play (Net-a-Porter). Both have an important role to play. A brand’s website will operate as both a sales channel for those committed customers who engage with the brand in particular, but also as a marketing mechanism to help drive brand integrity. Meanwhile, for those consumers not wedded to a single brand, an aggregator can provide both choice and range, but also inspiration and advice. Their customer base provides the brand with incremental sales and a route to acquiring new customers who may not have otherwise visited the brands own website.

We see the luxury industry's penetration of the online market doubling within the next five years.

But Net-a-Porter was established at a time when luxury goods brands knew little about online, were avoiding the channel and had little in the way of in-house capabilities. As a result, the early aggregators, of which Net-a-Porter was the pioneer, built a traditional wholesale business model that echoed traditional department stores, buying and pushing out merchandise to customers. For brands this offered a simple solution to online. Net-a-Porter was simply another wholesale account that offered incremental sales to online consumers.
However, as technology has advanced and the online capabilities of brands and retailers have improved, is this business model still the optimal solution for either brands or consumers? We fear not. New models are emerging that potentially fit better with the strategies of luxury brands.

One such model is operated by Farfetch. Unlike established aggregator peers, Farfetch is a platform player, aggregating the inventory of its boutique partners without holding any inventory itself. Instead, Farfetch’s algorithm directs orders to boutiques that hold the inventory and are linked to a local fulfilment network. An order placed by a customer is directed to a boutique based on proximity, cost of delivery and the boutique’s fulfilment record.

For the customer, there is very little immediate difference between using the Farfetch platform and the Net-a-porter platform. However, by partnering with boutiques — currently more than 400 — Farfetch is able to offer a wider selection of brands. At the same time, it benefits from the buying expertise of its boutique partners in effectively curating a relevant range. With no inventory to manage, the cost of bringing new boutiques on board is minimal, restricted essentially to image processing and data mapping.

For the boutiques, the advantage is incremental sales, without any risk of online cannibalisation, and potentially more customers through their doors as it is possible to collect or return goods ordered via Farfetch at its partners’ physical stores. Crucially, orders placed through Farfetch bring incremental profit at a handsome margin.

The Farfetch model is certainly working: the company is growing at 60 percent per year and looks to be on course to overtake Net-a-Porter as the largest online aggregator within 24 months. Meanwhile, in a changing market and against increasingly aggressive competitors, the Yoox Net-a-Porter group is ceding market share. Indeed, at a time when the company is having to manage its challenging merger, we fear Yoox Net-a-Porter risks being left behind by the industry’s changes.

Luca Solca is the head of luxury goods at BNP Exane Paribas. Simon Bowler is head of General retail at BNP Exane Paribas.

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