The Great Luxury E-Commerce Reckoning

0:04Hi, this is Imran Ahmed, founder and CEO of the Business of Fashion. Welcome to the BOF. podcast. It's Friday, November 29th. This was the year of the great luxury e-commerce reckoning. Giants have fallen, fortunes have shifted, and the online luxury landscape has been completely altered. It all started in 2000 when Net-A-Porter and Ux were founded in the UK and Italy, paving the way for an entire industry to explore its relationship with e-commerce. By 2010, there were multiple luxury e-commerce players competing on both sides of the Atlantic. Financial investors wanted a piece of the action.

0:45They poured billions of dollars into these companies. Matches fashion was acquired by Apex Partners at a reported$1 billion valuation. Farfetch raised more than$1 billion in venture funding and then raised$885 million during its IPO in 2015. During COVID, Farfetch's stock rose to an all-time high, achieving a market cap of more than$26 billion. And then, everything changed. Three of the luxury industry's biggest e-commerce players were in big trouble. Late last year, Matches Fashion was acquired by Fraser's Group in a fire sale at a fraction of its Apex valuation. But the business wasn't viable and went into administration in March 2024.

1:32Meanwhile, Farfetch's share price plummeted by 98%, bringing the company to the brink of bankruptcy, only for it to be rescued by South Korea's coupang. As a result, the long-mooted merger between Farfetch and Yuke's Net-a-Porter was now on the rocks. Richemont had to find a new owner to get YNAB off its books, extending a year's long effort to offload the struggling business and taking write-downs totaling almost 4 billion euros. What happened? I mean, high level of debt and inflation and high interest rates, you have a problem. Suddenly you need cash, a model that was never cash producing. So I think many companies were just not prepared for that something like that could happen.

2:21And I think, did we know this was going to happen, this sudden slowdown in aspirational demand? No, but I think we were well prepared. We saw private equity enter our space. I think, you know, a lot of really clever guys in suits thought, how hard could this be? And, you know, maybe approached it with the same way as, say, they had success with a grocery chain in Canada. suddenly the thought that they could apply that logic to fashion because the product is seasonal, of course. And we saw that that is not the case. This week on the BOF podcast, I'm pleased to share a timely conversation from BOF Voices 2024 with MyTheresa CEO Michael Klieger and co-founder and chief brand officer of Moda Operandi, Lauren Santo Domingo, examining what went wrong in the luxury e-commerce sector, how they are navigating the ongoing luxury slowdown, and what comes next.

3:18Plus, we get the lowdown on Michael's plans for MyTheresa's post-merger integration of UxNetaporte, a deal which is expected to close in the first half of 2025. Here's Michael Klieger and Lauren Santo Domingo on the POF podcast.

3:41Well, let's get into it. Before we talk about all of the stuff that you guys have been working on in this extremely complex operating environment, I want your very quick take of what you think went wrong. I went through some of it very quickly, but what were the maybe one or two things that you think were most significant? Michael, let's start with you. I mean, I think you summarized well what happened in terms of the outside pressures. And if I have to distill it, many companies were just not prepared for that something like that could happen. And I think, did we know this was going to happen, this sudden slowdown in aspirational demand?

4:24No, but I think we were well prepared. No debt, high variable cost, an understanding which customers are profitable, which are not. So we had to react like anyone else. And we did react, but we were at least better prepared. I mean, high level of debt and inflation and high interest rates, you have a problem. Suddenly you need cash, a model that was never cash producing. So I think the essence was we had to deal with all the pressures also, and we felt them, but we were more prepared. But do you think the underlying business model, like leaving aside some of these external factors like inflation and high interest rates and high levels of debt that some of these companies had taken on, the underlying business model, you still believe in it?

5:13I absolutely believe in it because there is a consumer that wants to shop like that. It's like in the late 80s, every airline in the U.S. was in Chapter 11. But no one said, will people fly? Of course they fly. But the players at that time hadn't understood what the customers want. And then there came some new entrants. And so there is a huge demand of professionals working, less time. They want to consume luxury. They want to buy it. I think we're in a cycle. There's not a structural challenge. But as a company that wants to serve customers, you need to find the right model and to fine-tune. And if you had it yesterday, it doesn't mean you have it tomorrow.

5:56And that's the traditional game. So I don't declare that online luxury is over on the contrary. OK, Lauren, what's your take? What went wrong? You have a different vantage point. Smaller business maybe had to navigate some other challenges because some of the investors, the types of investors that I mentioned were invested in your business. What went wrong from your point of view? And how have you navigated the last 12 to 16 months? Well, our focus has always been connecting the best designers with the best customer. Understanding the customer, understanding the industry has always really been at the core of what we do.

6:36And I think we saw private equity enter our space. I think, you know, a lot of really clever guys in suits thought, how hard could this be? And, you know, maybe approached it with the same way as, say, they had success with a grocery chain in Canada. Suddenly the thought that they could apply that logic to fashion because the product is seasonal, of course. And we saw that that is not the case. And the people that really know this business and this industry and understand this customer are the ones that are going to succeed. So given that you're both clearly believers in this sector, I want to know what you're doing now to withstand some of this pressure.

7:17There's still a depressed market when it comes to aspirational customers. There's still kind of consumer shock from high prices. Prices on average have increased across the board for aspirational customers around the world, like 20, 25 percent. So what are you doing now, Michael? We'll talk about the merger in a minute. But as a like in terms of the operating model of MyTheresa, which ever since I met you, I was always really taken with your focus on long term value of customers. Talk to us about that. I mean, exactly what Lauren just said. It's the customer. You need to know who the customer is, what they want, and then cater to that.

7:59And it is, of course, shifting, changing, but it's the customer. And we have, I believe, done a very good job in defining who we want to serve, the ones that consume more, but particularly more regularly. and we have seen that this customer is very resilient. They're very demanding. We see at the moment that these customers want more experiences than ever, be it in the way they live their life. Sort of the amount of clothes and accessories we sell for going on vacation has doubled, but they also expect from us more experiences than just access to product. We are very privileged in serving these top 3%.

8:46They are resilient. I mean, the mood is good. Stock market's up. Real estate, except for Asia, is stable. Commodity price is up. So it's not that they're not willing to spend, but you have to be attractive. You have to create desirability. And that is the essence. If you pin it down to financials, it's exactly what he said. you can invest a ton of money in attracting customers and entertaining customers as long as you have the customers that over a long period of time spend. And since 2015, I mean, we have a cohort model. The cohort of new customers of 2015 are still each year spending more for the last nine years.

9:35So this cohort that we attracted in 2015 in totality is still growing. And if you have a model that works like that, you can still screw up, but you're fundamentally in a good position. So you once told me this story, Michael, and I'm probably not going to remember it exactly right. So correct me if I'm wrong, but there was this excessive investment that a lot of these companies made in customer acquisition. Search marketing, social marketing, all that digital marketing. and because they were all competing against the same search terms in the same places, the price of that marketing grew. But you looked for signals.

10:14Your company, my Teresa, you found signals of knowing which customers to target. What were you looking for in those early interactions with potential customers that helped you know they would be a cohort that would be still spending nine years later? As I said, I mean, you can spend a lot of money in customer acquisition costs, which is largely online marketing, if you get the return, if you get the stickiness of customers. So the logic that we applied from the beginning, we are not bidding for traffic. I mean, I hope no one does anymore. You're not bidding for revenue. Many companies still bid for revenue.

10:49We are bidding for customers. And so our whole attribution logic and bidding landscape, technical landscape. We rebuilt in 2017. I mean, our average CAC is about 170 euros. Can you explain what CAC is to everyone who doesn't know? I'm sorry. I'm so into it. Customer acquisition costs. So in that lingo, how much do you spend until someone buys? And so the average customer acquisition cost is 170. You can spend 100 on a pair of sneakers and you have revenue, but that customer statistically will not buy again and you can pay 500 to acquire someone that buys a jacket double dressed it cashmere jacket that customer will come again and again and this is just too little you ask for triggers what type of products people buy if someone buys a bag interesting an expensive bag has very little predictive power whether this is a returning customer or not because a bag can be the one-time indulgence and luxury, or it could be the 15s bag.

11:58But there are products, there are payment methods, there are addresses, time of day, shipping methods. We build a model, an algorithm, before AI was a word, and it's feeding all on this and is looking for triggers, what correlates with a big LTV, lifetime value. And this is how we organize the whole company, not only in bidding, in services, in operations, in the warehouse. That is what we try. I love this because it's the science, the left brain side of retail. But another thing that deteriorated a lot over the last five or six years with a lot of these luxury e-commerce retailers is the right side, the curation, the creativity.

12:45You know, you could log into these websites and they all look the same. They had all optimized around the same product page, the same, everything looked the same. So to the customer, they were indistinguishable and interchangeable. So they would just go where the cheapest price was. You could find all the same products, all the same brands, all the same stuff. So the only way to compete was on price, which led to discounting. Lauren, talk to us at Moda Operandi. one of the things you pride yourself on is curation. Talk to us about the importance of curation in the future of luxury e-commerce. Well, I think going back to grocery and a lot of times like the big retailers, the experience of shopping for clothing is the exact same of shopping for your groceries.

13:28It's just an endless scroll with the same fonts and it lacks any sense of individuality. So what we really pride ourselves on is differentiation. You know, My Teresa is very much like the North Star in our industry for a beautiful, well-run company, great service. So for a small retailer like us, where we really win is on differentiation. So we lean into curation. We lean into young designers, emerging brands. Two-thirds of our designer assortment are new brands. And then from there, we really lean into storytelling. We have beautiful photography, editorial. And, you know, that's why the brands want to be with us because we are brand enhancing.

14:15We will connect the best product with the best customers. And at the end of the day, we have the finest customers in the world. So I think that's why everyone keeps coming back. Talk to us about your customers, because, you know, I was talking in the intro about that small cohort of customers that both you and Michael have kind of gone after, but in very different ways. You have this model, which was kind of a pioneering model in the industry, which was to sell based on fashion week to do trunk shows like the ones that people would do in the pre-digital era, where if you were lucky, you could go meet a designer and order clothes in advance.

14:51That is a nice experience for your customer, but it also gives you interesting information that you can use elsewhere in your business. Talk to us about that. So, yes, we do 600 trunk shows a year. That's a big differentiator for us. So the runway shows happen in New York, London, Milan, Paris, where they're photographing the collection. And then we make it available to our customer. That's an incredible customer acquisition tool because it's a very small subset of women who are going to want to shop the most expensive pieces from the runway, pay for it six months in advance and wait for it. So right there, without an algorithm, without an AI, we know that's the best customer.

15:28And with that, it also gives us an incredible amount of data. It was actually Imran who, you know, really was the one who was encouraging us to use the data that we were getting from trunk shows. So within seven minutes of a collection going down the runway, we can tell which styles are going to hit in which colors, in which sizes, in which regions. So when we take that information and we use that to inform our inventory buy, that inventory is going to sell through significantly higher. That leads to much less waste at the end of the season. Therefore, we are not a promotional business. We focus on full price sales.

16:09We are a full price business like that. We have had the healthiest margins and sales in the last six months that we've had in our entire existence. And it's really this flywheel of information. We can layer on top of that, you know, a hybrid marketplace where then we're taking items from a designer's marketplace, putting that on top. So we can be incredibly conservative with inventory, but be able to provide the best assortment and curation that exists. We'll be right back with more on the BOF podcast.

16:52it's really interesting to hear both of your strategies because there's similarities and differences you made it through this slowdown but we have to talk about what's coming michael your big news last month this is the first time you're talking about it in a public place so i have the opportunity to ask you people very quickly you didn't know when you do i get to ask i didn't I didn't know. I didn't know. But I had an inkling it might happen. And so it just worked out nicely for us. But in a quick one minute, the rationale for the deal to take on YNAP, which growth is slowing, unprofitable, really complicated tech infrastructure.

17:36How do you make that work? I mean, that's another question. Why did we do the deal? and it comes back to what both of us believe, it's the customer. And despite all the problems that have been written about, the challenges that the business is facing, if you talk to customers, and I talk to a lot of customers, Netta Porter, Mr. Porter, there's still amazing brands. There's loyalty, there's love and emotions. These were the pioneers in our sector. and in a different way, but in the same way, Yooks, I mean, Yooks was started 25 years ago. They were the absolute pioneer of doing off-season online.

18:18And so the reason we feel this is a unique opportunity is because there are these powerful brands that stand for something. And I can only compliment you, Moda stands for something. There is a clear differentiation and these three brands, they stand for something and we are fundamentally convinced that we can make this work because the issue is not in the front, the issue is in the back. There are technological challenges. There is a level of complexity that is mind-boggling. I think the approach the company took was to manage complexity. We will try to reduce it instead of managing it. Can you talk to us a little bit about that?

19:00Because I understand that part of your plan, there was this massive replatforming that happened at Ukes Net-A-Porter Group where they moved all of the businesses onto the same tech stack. And one of the things I understood was that actually the tech stack that they built wasn't great for full price, like Mr. Porter, Net-A-Porter type businesses. And it's not necessarily ideal for the Ukes off-price business either. So like, how are you solving this technology problem? because this is like actually one of the most costly, challenging things to do. You're absolutely right. And just let me know, it's not approved yet.

19:37So it's a pending deal. I have to... I said that in my intro. So our idea is, and I think the landscape you described is even more complex because that infrastructure, that joint infrastructure they created was also intended to serve the services part. So with the same technology, they were and are serving other people's online shops. So maybe on paper, maybe not even on paper it made sense, but it's just not workable. And you need to separate. You need to give the different businesses the tech stack they need, because then you can reduce the complexity. It has been announced already that the services business is going to end.

20:18I mean, that has been initiated before even that transaction was agreed. and by separating, we can provide the off-price business a much slimmed down, streamlined solution. And then, of course, the big question for any investor was, what do you do with the luxury business? And there we have, of course, this huge strategic advantage. We have a tech stack. We have an infrastructure that serves a luxury business. And even though it is very different in positioning, the fundamental feature needs are the same. So the vision, the idea, which is a difficult exercise, is to bring the luxury part, the Netopoda, Mr.

21:00Porter, onto our platform that we have developed. That is, we have launched last year in April. It's running like a charm. And it's a two to three exercise. We have not been shy about it when we announced it to our investors. That part. But then we believe it will really unlock a power and focus. It's really about focus. Focus on your business, focus on your customers. And today there's so much energy going into the back instead of the front end. Exciting customers, inspiring customers. Hopefully that's the one we will solve for. Lauren, you said you had a question for Michael. You're probably not going to be able to answer it.

21:40I was wondering, how do you plan to differentiate the different titles? Good question. No surprise. The first basic fact, and we have announced that, is we will keep these companies separate. Separate buying teams, separate editorial teams, separate marketing teams. We are highly curated, which is great to our customers. We only carry about 250 brands in women's wear. But it comes with a cost. And it should, because otherwise you're not differentiated. We are not the website to go for emerging talent. We have a great curation of established brands. If you look for emerging talent, Netta Porter is about 800.

22:21And emerging talent is not contemporary. It's also luxury. There are fantastic designers, young designers that do, in terms of fabrication, in terms of material, amazing luxury products. But they're not on MyTeresa. But they should be on Netta Porter and are and will be. The other point is Netta Porter, because of Natalie, has this strong voice, this editorial leadership always. That's actually not what MyTeresa does. We serve a customer that is so product focused and wants to immediately go to the product. And these are just two examples that we will fight, defend, because when they become similar, we didn't achieve anything.

23:06We actually lost a lot of money. I have time, I think, for one last question, Michael, and I want to leave it with you. In my work as a management consultant, I worked on a lot of post-merger integration. It sounds as bad as it is. And, you know, one of the challenges with the Ux Net-A-Porter merger was a cultural clash. You know, the two cultures were so different. You're now bringing together Ux, which has its culture. You're bringing together Net-A-Porter and Mr. Porter, which very much has the culture of Natalie and all of the kind of legacy that she left. And you have MyTheresa. What work are you doing in that kind of post-merger integration on the soft side?

23:50I understand all the tech infrastructure. I understand the plan to keep the brand separate. But how do you make it work from the human perspective? I mean, if people ask me what keeps you up at night, it's actually not the tech. I have great technical engineers. I trust them. We will solve that. What you just mentioned is, also when you look into the history of Jukes and Edelporta, that was and is the biggest challenge. And it is respect. It is communication. It is relationship building. It is the right balance between fast and slow. It's all of that, which there is no mechanical textbook on that.

24:36It's people. And our business is not only on the customer side people, it's also on the employee side people. It's a people business. It's about emotions. I mean, no one needs what we sell. But they want it. So it's an emotional business. And that, I don't give you the 10 steps because I don't have the 10 steps for this cultural integration. With the one remark, we don't want to integrate the cultures. We want to respect the different cultures because they feed the different brands. We want a company that has some operating principles, some values, but we believe there is a logic for a cultural advantage being founded and run in Bologna.

25:22I mean, Ux is a Bologna company, and it's scrappy, and it is aggressive, and was always that, and it's a Bologna culture. And if you think about Netta Porter and Mr. Porter, it is Natalie, but it's also London. Yeah. And then you have my Teresa. So don't even start, okay, I put that all in a blender. It's something very non-tasteful will come out of that. Respect it, but still provide a framework. We want to be one company and we want to have everyone together. Three beautiful wines all behind the same bar. I look forward to tasting that wine. I'm really grateful to both of you for sharing that.

26:02I mean, it is a lot to have navigated this environment. And I think we all learned a lot from this conversation. So thank you very much.

26:16The BOF podcast is edited and produced by Olivia Davies and Eric Bria.