Will the Farfetch-YNAP Deal Work? It’s Complicated.

This week, Swiss luxury group Richemont announced that it is selling 47.5 percent of loss-making Yoox Net-a-Porter (YNAP) to rival Farfetch as part of a complex agreement that contains provisions for a full acquisition within a few years.

The deal values YNAP at around €1 billion, sharply down from both its €5 billion valuation in 2018, when Richemont acquired full control of the group, and recent estimates, which valued YNAP at about €3 billion. As a result, Richemont is taking a €2.7 billion non-cash writedown on the asset.

And yet, Richemont shares went up 3 percent after the news was announced, reflecting investors’ relief that the conglomerate, best known for its expertise in hard luxury, is finally ridding itself of what many considered a money-sucking distraction from its core business. (In recent months, Richemont has been targeted by activist investors, whose list of grievances was topped by inaction on YNAP.) Farfetch shares, which have suffered significantly over the past year, are up 47 percent over the past five days, indicating that investors liked the deal.

How did YNAP, which pioneered — and once dominated — the multi-brand luxury e-commerce market, become such a drag on Richemont’s portfolio?

When Richemont offered €2.7 billion to gain control of YNAP in 2018, valuing the overall business at €5 billion, the group was the market leader, with strong brands in both men’s and women’s wear, with Net-a-Porter and Mr. Porter, and off-price, with Yoox and The Outnet. YNAP aimed to reach €4 billion in annual revenue by 2020.

However, YNAP hit turbulence long before Richemont, which first invested in Net-a-Porter in 2010, gained control of the group eight years later.

In the mid-2010s, Net-a-Porter was the shining star of luxury e-commerce with an unimpeachable brand, top fashion labels and a winning customer experience. Amazon and Farfetch were among those interested in exploring a potential merger or acquisition. But Richemont chair Johann Rupert, who often extolled the potential power of an agnostic technology platform to service the entire industry’s e-commerce needs, made a bet on merging Net-a-Porter with Yoox, the Italian off-price e-tailer, which also provided white label e-commerce, logistics and distribution services to several major luxury brands, including Moncler, Giorgio Armani and some of Kering’s top houses.

The bet proved costly. A major technology replatforming, started in 2016, was fraught with problems ranging from diminished online services to dysfunctional warehouses, costing the group hundreds of millions of dollars and degrading the customer experience along the way. There were also inventory management problems at Yoox, which forced Richemont to write down €165 million of YNAP’s value in 2019.

Beyond the financial woes, the corporate cultures of Net-a-Porter, based in London, and Yoox, based in Milan, never fully gelled. By the time the pandemic hit in March 2020, YNAP was in no way prepared to service the increase in online demand for luxury goods. The group was unable to ship product for months on end, and its technology problems persist to this day. In June, Net-a-Porter sent an email to US customers, apologising for disruptions to the site and offering a 10-percent discount with the code “SORRY10.”

These technology missteps allowed competitors like Farfetch to scoop up market share. Farfetch also benefited from a wider industry shift, as big luxury brands pivoted away from the digital wholesale model, which Net-a-Porter had pioneered, and doubled down on their own stores and direct e-commerce channels. Increasingly, they turned to multi-brand retailers with concession (and e-concession) models, giving them more control over how their product was priced and presented, not to mention a larger cut of profit margins. As a marketplace, Farfetch found itself at the centre of this change.

Richemont’s Farfetch deal, by which YNAP will migrate to Farfetch technology, should enable Net-a-Porter and Mr. Porter to operate more smoothly, retaining the customers who have remained loyal despite the challenges, while giving Farfetch more access to an older demographic. The partnership will also bring several former YNAP leaders back into its mix, in what Farfetch chief customer officer Stephanie Phair (and former Net-a-Porter executive) called a “full circle” moment on her LinkedIn profile.

Farfetch, which has gone on a deal spree over the last decade — most recently entering a joint venture with American department store Neiman Marcus — will now own what remains the most important brands in the luxury e-commerce category. The move also further establishes Farfetch as the leading technology service provider in the luxury space, powering websites for Richemont properties like Cartier and IWC.

And yet, YNAP’s tangle of logistics and distribution problems won’t be easy to undo, adding to Farfetch’s own mountain of challenges. After an early pandemic surge, its stock price has plummeted 80 percent over the past year. Its two major bets — that luxury e-commerce adoption will continue to soar, and that a large percentage of the industry will need Farfetch’s back-end services — remain in question. In its most recent quarter, sales were up 10 percent, but the company remained unprofitable on an adjusted-EBITDA basis.

For years, analysts have been predicting a major consolidation in online luxury. Now that it’s finally here, the quest to establish a consistently profitable business at scale still feels uncertain.

THE NEWS IN BRIEF

FASHION, BUSINESS AND THE ECONOMY

Italian fashion group Zegna raises guidance for 2022. Italian fashion group Ermenegildo Zegna raised its full-year guidance on Friday after reporting a 21% increase in half-year revenue. The Italian luxury menswear brand on Wednesday also announced a partnership with Spanish football club Real Madrid, set to launch this season.

Nordstrom falls after cutting its full-year earnings forecast. The department-store operator lowered its forecast for full-year sales to a range of 5 percent to 7 percent. That one-percentage-point cut comes just three months after Nordstrom had raised its outlook by a percentage point. Nordstrom also trimmed its forecast for earnings per share on Tuesday.

Gap tops revenue estimates on strong demand for Banana Republic. Second-quarter net sales of $3.86 billion beat expectations of $3.82 billion, buoyed by a 9 percent jump in sales at Banana Republic. Still, the company withdrew its annual forecasts as the apparel chain struggles with inventory build-up and tepid demand at Old Navy.

Paris Fashion Week schedule released, including several debuts and returns. The week will featuring over 100 shows and presentations from Sept. 26 to Oct. 4, including Victoria Beckham’s and Zimmermann’s Paris debuts, The Row, Dries Van Noten and Lanvin back on the schedule and Louis Vuitton, Miu Miu and Chanel on the final day.

US demand to lift India’s lab-made diamond exports to $8 billion. India, which cuts or polishes about 90 percent of the diamonds sold in the world, is ramping up sales of laboratory-made gems as US demand surges and they become more accepted in other markets.

Macy’s warns of discounts hitting annual profit as inflation saps demand. Macy’s Inc. cut its full-year sales and profit forecasts on Tuesday, with the company saying it will need to offer more discounts to get rid of excess inventories of casual and athleisure apparel, even as demand for luxury products holds up.

Adidas chief to step down in 2023; replacement search under way. The German sneaker company said the board and Kasper Rorsted had “mutually agreed” he would hand over the top job during the course of next year, according to a statement Monday. Rorsted will remain chief executive until a successor has been appointed to ensure a smooth transition.

THE BUSINESS OF BEAUTY

Coty rides beauty boom, beats revenue estimates. Net revenue in the fourth quarter ended June 30 rose 10 percent to $1.17 billion, beating analysts’ average estimate of $1.14 billion, according to IBES data from Refinitiv.

Revlon tells bankruptcy judge its shares may be worthless. The company urged US Bankruptcy Court Judge David S. Jones in Manhattan to reject the request from minority equity owners in part because low bond prices imply that equity has little hope of recouping anything.

PEOPLE

SCAD names Dirk Standen dean of School of Fashion. The former Style.com editor and founding editor of Condé Nast’s creative agency 23 Stories will oversee Savannah College of Art and Design’s undergraduate and graduate programs in fashion design, marketing and management, fibres and accessory and jewellery design. Standen joined SCAD in 2021 as a professor of fashion marketing and management.

Thom Browne named Notre Dame artist-in-residence. The fashion designer and Notre Dame alumnus will join a Notre Dame Institute for Advanced Study research group that brings together experts and students from various disciplines to investigate a particular theme. Browne will visit campus and contribute to research on the idea of public life.

Hodinkee names five new editorial staffers. The watch-focussed start-up has announced the hiring of Anthony Traina, Mark Kauzlarich, Malaika Crawford and Brandon Menancio as editors, and freelance contributor Sarah Miller as senior writer.

Compiled by Joan Kennedy.