Shopping For Luxury Online Has Fallen Out of Fashion | Mint

Shopping For Luxury Online Has Fallen Out of Fashion

Sales are slowing across the luxury industry, but the decline is most intense online.
Sales are slowing across the luxury industry, but the decline is most intense online.

Summary

Stocks that unite two of the world’s most successful industries, European luxury and American tech, might sound like winners. Instead, companies that sell luxury goods online have turned into quicksand for investors.

Stocks that unite two of the world’s most successful industries, European luxury and American tech, might sound like winners. Instead, companies that sell luxury goods online have turned into quicksand for investors.

After a sales boom during the pandemic, online luxury stores are grappling with flagging demand and widening losses. Two New York-listed players, Farfetch and MyTheresa owner MYT Netherlands Parent, have lost around 90% of their market value since initial public offerings in 2018 and 2021, respectively.

Farfetch’s founder is considering taking the troubled company private. But a delisting could derail consolidation that looked to be the sector’s best hope for cutting losses. Farfetch broke even early in 2021 but slipped back into losses a few quarters later. MyTheresa was profitable in the first few quarters after it went public, unusually, but has since slipped into the red.

Last year, Farfetch agreed to a messy merger with Yoox Net-a-Porter, another loss-making online luxury store. YNAP’s owner, Swiss luxury goods company Richemont, agreed to accept payment in Farfetch shares in return for offloading a stake. YNAP would end up without a controlling shareholder, as a third investor will hold a small stake—a hint that neither side wants to consolidate the company in its accounts while its prospects are so unclear. How this deal, which still hasn’t closed, might be impacted by Farfetch going private remains unclear.

Online retailer Matches, which is owned by private-equity firm Apax Partners, is also in poor shape. It is looking for a cash injection as it tries to turn around the business, according to a report this week in trade publication Drapers. The company’s lenders have also had to waive its debt covenants several times.

The pandemic turned out to be a mixed blessing for luxury e-commerce stocks. Consumers who couldn’t get to stores because of lockdowns splurged through websites. The share of luxury sales that happen online surged from 12% in 2019 to 22% in 2021, data from Bain & Company shows.

But luxury brands’ own websites may have benefited more than online department stores like YNAP. Labels such as Louis Vuitton upped their digital game and invested heavily in e-commerce. Wary of discounting, they have also grown strict about how their goods are sold online by third parties. Increasingly, they want multibrand websites to let them sell through a concession model, which gives brands full control over inventory and pricing.

Under this setup, e-commerce companies don’t have to buy inventory, which is a plus. But there are downsides: The commissions they earn from concessions may be lower than wholesale margins and they have less freedom to use discounts to attract shoppers. They can’t handpick all the goods they sell, either, which makes it harder to stand out in a competitive market.

Sales are slowing across the luxury industry, but the slump is most intense online. While the market for expensive handbags, shoes and clothes is expected to grow by 7% at constant exchange rates this year, down from 15% in 2022, online sales could fall 2.5% according to the midpoint of Bain’s estimates.

Big brands are feeling the drag. French luxury giant Kering, which owns Gucci and Bottega Veneta, told investors on its latest results call that its e-commerce operation shrank by around 30% in the third quarter. Kering thinks the business is underperforming because it is more exposed to aspirational shoppers, who have sharply pulled back spending.

Muted e-commerce sales aren’t necessarily a bad thing for luxury brands. They still prefer customers to come to their fancy stores, which double as a marketing tool. And during the pandemic, they developed a new method of selling remotely with which they seem more comfortable. Sales assistants communicate with shoppers on WhatsApp or over Zoom and send goods to customers’ homes for them to try on. These kinds of transactions make up 20% to 40% of some brands’ business today and blur the boundary between online and store-based sales.

Pure e-commerce will be hit hardest as the luxury industry passes through its current funk. Investors should steer clear of bargains on the web.

Write to Carol Ryan at carol.ryan@wsj.com

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