The Start-Ups Defying the Luxury E-Commerce Slump

Last autumn, as marquee luxury e-tailers Farfetch and Matches scrambled to secure additional funding in order to avoid bankruptcy, a newer luxury marketplace was facing the opposite scenario.

Cult Mia — a platform that launched in 2019 selling an assortment of hyper-feminine garments from independent designers — had so much investor interest, it ended up raising a $3.5 million seed round in November, nearly doubling its initial financing target of $1.8 million.

The reason investors — including Morgan Stanley — found the company an appealing prospect is because of its financials. In 2023, Cult Mia generated 70 percent gross margins and doubled its sales; it anticipates it will do the same this year.

Those numbers seem mythical amid the ongoing luxury e-commerce reckoning. Once heralded as the future of shopping, many of the major luxury e-commerce players have lost their edge. Sales and growth declines have mounted as individual brands invest more heavily in their direct channels and aspirational shoppers have pulled back on luxury purchases, leading to an inventory glut that prompted profit-dampening discounts. In the past six months alone, Farfetch narrowly avoided collapse by selling to South Korean retail giant Coupang in December, ending plans for Farfetch to acquire competitor Yoox Net-a-Porter, which is still seeking a buyer, while Matches was put into administration in March. Mytheresa remains a bright spot: Its sales grew 17 percent in the first quarter of the calendar year, propelled by exclusive offerings, such as capsule collections from brands like Loewe and Brunello Cucinelli and money-can’t-buy experiences for top spenders.

While the sector’s biggest names teeter on the edge, an entire cohort of smaller luxury marketplaces — including Cult Mia, Wolf & Badger, Garmentory and Verishop — have found success with a different approach. Instead of competing for high-income consumers with a product assortment full of blockbuster brand names, they’re appealing to aspirational shoppers with exclusive selections of $200-600 items from emerging brands. These platforms have grown profitably by refusing to own any inventory, selling marketing services to their brands and boutique partners and keeping a lid on discounting.

What’s more, they aren’t directly competing with each other to sell the world’s most recognisable brands — in fact, some of them aren’t looking to sell those brands at all. Maintaining a unique, differentiated offering of indie brands could be exactly what helps them reach lofty heights, said Marissa Lepor, director at investment bank The Sage Group.

“I don’t think scale and differentiation are mutually exclusive. You can’t be something for everyone,” Lepor said. “Customers like to feel like they’re curating their own lifestyles. There’s quite a wide audience for something like that.”

A New Value Proposition

The high costs of buying and storing inventory proved to be a death knell for major luxury e-commerce players — but their smaller-scale counterparts are not afraid to pass their operating costs onto the brands they stock.

Cult Mia, Wolf & Badger and Garmentory all run on a model where brands are responsible for packing and shipping their own orders and the platform takes a cut of each sale.

They also avoid covering other logistical expenses that can eat away at profit margins. Cult Mia requires new brands to submit their own product images. This not only contributes to the platform’s high gross margins, it also allows Cult Mia to avoid further investment in designers that haven’t yet proven their sales track record on its platform.

Recurring revenue streams — outside of sale commissions — have also provided a cushion for operating costs.

Wolf & Badger, a 14-year-old marketplace, charges brands a $375 monthly fee on top of the commission it makes on each sale. Those fees help pay for the company’s operational expenses, including the development and maintenance of its in-house software, said George Graham, the company’s co-founder and chief executive. Wolf & Badger finished 2023 as its first profitable full year, Graham added.

The goal is to “build a compelling platform for the brands altogether to be able to succeed.” Graham said.

They also offer additional services for a fee. In February, Seattle-based platform Garmentory introduced an Amazon-like marketing service, where brands can pay to appear higher in customers’ search results on the site. So far, 20 percent of the brands that sell on the platform have used the service, said Sunil Gowda, Garmentory’s co-founder and chief executive.

These marketplaces also have a firmer grip on online luxury’s ongoing discounting conundrum, smaller players give brands autonomy around pricing and markdowns.

Garmentory, for example, lets brands choose if they want to participate in the platform’s bi-monthly promotions, plus, those that opt in get to decide how much of a discount they’re willing to offer. Garmentory doesn’t add additional markdowns without the brands’ consent, which keeps profits margins high for both the brand and the platform. Garmentory’s EBITDA profit margins are on pace to reach as much as 20 percent in 2024, Gowda said.

An Experience You Can’t Get Elsewhere

Similar assortments eroded the differentiation between sites like Farfetch and Net-a-Porter. These marketplaces, on the other hand, carry emerging brands, many of which they serve as the exclusive wholesale partner for. That means their shoppers are less inclined to price match on competing sites.

A tighter product selection is especially crucial for marketplaces whose competitive edge is carrying emerging brands, said Robert Burke, chief executive of retail consultancy Robert Burke Associates.

“If it’s for the slightly undiscovered brands, it’s even more important to not offer too much as it could become a sea of emerging brands that maybe don’t resonate,” he added.

Platforms routinely reject brands to maintain a streamlined range of products. Cult Mia only carries 15 percent of the more than 2,000 brands it’s looked at since launching. The company assesses quarterly sales for each brand and delists whichever labels are not performing well, said Nina Briance, Cult Mia’s founder and chief executive.

“We don’t believe in carrying a product that isn’t resonating with our customers,” Briance said. “More is not more when it comes to customer experience, and curation is king.”

Another often untapped opportunity to stand out online is on-site personalisation.

In March, Wolf & Badger introduced a tool that shows individual shoppers a unique homepage based on their purchase and browsing history. It also has an existing feature that automatically filters search results for users based on similar criteria.

“We’ve been able to build a really powerful retail engine that does help us convert well and drive profitable order economics by connecting the right consumers with the right products at the right time,” Graham said. The company is on pace to grow its gross merchandise volume — a measure of sales done through the platform — by 30 percent year over year to more than $100 million in 2024.

Giving customers a curated product selection with a point-of-view — Cult Mia is more romantic and sleek, whereas Wolf & Badger’s assortment feels more eccentric and playful — is essential when it’s harder than ever to get and retain consumers’ attention online. Plus, indie labels are increasingly in vogue for consumers burned out on major luxury labels, said Brian Ehrig, a partner in the consumer practice of management consulting firm Kearney.

“There’s been so much growth in the top end of the luxury market with the brands that everybody knows that it’s now become a little cliché to wear some of those brands,” Ehrig saId. “If you’re a fashionable person, perhaps you’re going to be looking more towards these indie brands.”