Is it game over for sector’s biggest names?

Matches has laid off almost half its staff — 273 people — as it trades through administration while a buyer is sought by insolvency specialist Teneo. The company had employed 533 people in its three London stores and at its HQ from where it sells to consumers in 170 countries. 

Benji Dymant, joint administrator, said: “Like many luxury fashion retailers, [it] has experienced a sharp decline in demand over the past year, as a result of well-publicised pressures on discretionary spend, stemming from the high inflation and high interest macro environment.”

We’d already heard from owner Frasers Group (which only bought it for £52 million just before Christmas) that it was in worse shape than expected and would need a lot of investment to turn itself around. 

And we don’t know whether Frasers is considering a pre-pack administration deal. “The joint administrators will continue to assess the appropriate structure for the business as sale discussions progress,” we’ve been told.

So just what has gone wrong, not only at Matches but in the wider luxury fashion e-tail sector that once seemed destined to carve out an increasing share of luxury sales and in which UK retailers have been leading names?

Tough times

Just look at what’s been happening. Yoox Net-A-Porter (YNAP), the merged part-Italian, part-British group had been a headache for owner Richemont for years when in 2022 it struck a complex deal for Farfetch to take it on (but it would actually be “a neutral platform with no controlling shareholder”). But it remains a headache as that deal has collapsed.

And Farfetch was said to be close to collapse before it found a rescuer — Coupang, which thinks it can get it into shape for enduring profitability. Ditto Matches. But this time it’s rescuer got cold feet with Frasers Group putting it into administration just 11 weeks after buying it.

It’s all very different from the last decade when UK-founded, high-end fashion e-tailers were riding high.

In 2015, Yoox and Net-A-Porter merged to create luxury in-season and off-price e-tailer YNAP. Richemont liked its prospects so much that it bought control in 2018. 

In 2017, private equity giant Apax Partners paid a reported £800 million for Matches, leaving its founders, Ruth and Tom Chapman, “shellshocked”.

Then in 2018, London-based Farfetch listed on the New York Stock Exchange with a valuation heading toward $6 billion.

It seemed luxury fashion e-commerce would be one of the biggest growth drivers for labels that had once feared cheapening their image by selling online.

And it only got better from there. The pandemic was a boon to e-commerce with e-tailers the only game in town for anyone wishing to buy high-end fashion. Farfetch’s José Neves talked of “a paradigm shift in favour of online luxury” with Farfetch being a driver of that shift.

As the pandemic eased, many were convinced e-commerce would retain most of its market share and was set for years of powerful GMV and revenue growth as well as enduring profitability. 

How wrong they were.

Alice Price, Apparel Analyst at GlobalData, summed it up, telling Fashionnetwork.com: “Though it is not yet certain if Frasers Group will dissolve Matches completely or is using the administration to restructure the business and reduce its operational costs, this news represents the latest blow for luxury marketplaces. As well as Matches’ demise, Mytheresa and Yoox Net-a-Porter continue to report ailing demand, and Farfetch was acquired by Coupang in December for a fraction of its former £20bn valuation.”

For her, it boils down to two issues — cash-strapped aspirational shoppers and brands preferring DTC than wholesale.

“Luxury marketplaces remain affected by the wider slowdown in luxury demand, especially in Europe and the US, as aspirational shoppers continue to rein-in spend amid ongoing inflationary pressures,” she said. “Designer brands have also begun reducing their reliance on wholesale partners, instead investing in their direct-to-consumer businesses to garner greater control over their brand images and uphold their exclusive allure. This has caused marketplaces to suffer dwindling customer acquisition, with Matches resorting to discounting to entice sales which, in turn, impacted its margins as well as consumer perceptions.”

And fashion industry journalist and commentator Eric Musgrave believes the issues are a sign that luxury may not be as special as it thinks it is. “The sorry saga of Matches reminds us that the so-called luxury market is governed by the same rules of business as any other sector,” he explained. “There needs to be rigorous controls of costs. And there is not an infinite pool of wealthy people who keep buying things for the sake of it. Matches’ aspirations were far too ambitious and it has been, it seems, poorly run since Apax acquired it. Clever Tom and Ruth Chapman to exit when they did.”

But what other problems have these online giants faced that have contribute to their decline?

Costs/investment

The costs of selling an item online, delivering it and potentially processing it as a return are not insignificant. And for luxury operations in particular, trying to offer an experience that’s more than the shopper could get from ASOS or Zalando, adds to the costs. All those Net-A-Porter branded vans, Matches marbled boxes, priority VIP phone lines and other VIP services, extra-detailed product info, every item shot on a model rather than an avatar, 90-minute delivery and more cost money. 

Globalata’s Price told us: “Frasers Group’s decision to shutter Matches so shortly after it acquired the business suggests it underestimated the scale of investment and time required to oversee a turnaround. Although Frasers successfully steered luxury retailer Flannels back to profit after acquiring it in 2017, Matches’ online specialism would have presented Frasers with unfamiliar challenges that it would have lacked the expertise or capacity to easily resolve, due to most of its portfolio being multichannel. Selling luxury online is particularly tough, given shoppers generally prefer to try on and see expensive products in person before purchasing.”

Making customers feel special… all customers

There are plenty of online reviews talking of long waits on the phone, messed-up deliveries and late refunds at luxury e-tailers. That’s also true of peers further down the price scale. But the difference is that consumers are less forgiving when paying £900 than when they pay £24.99. However hard they try, it’s a tough call for e-tailers to replicate the luxury physical store experience online, especially at a time when consumers are enthusiastically embracing physical shops once again. 

Many e-tailers go all-out to target the most important, high-spending customers, and that makes sense. Mytheresa’s CEO Michael Kliger recently told Fashionnetwork.com that its top 3.8% of customers account for almost 39% of its business. But aspirational customers can’t be neglected and he admitted that reaching them is getting tougher.

Those of us without a trust fund like to feel that our £500 order really matters to a business even if it’s also dealing with orders in the tens of thousands.

And a major problem for in-season luxury e-tail today is that this customer has many other choices, rather than buying the high-end label shoes that might have cost £350 some 20 years ago but are now more than double that figure (even though inflation should have meant they cost ‘only’ £375).

So where do they go? To premium brands like those belonging to SMCP, or Zadig and Voltaire, Whistles, and the like. To the proliferating discount centres such as Bicester Village, those owned in Europe by VIA Outlets. To designer ad department store clearance sales. And online, they go to the burgeoning secondhand market.

Andy Mulcahy, Strategy and Insight Director at e-commerce data specialist IMRG, told us that’s the most important issue that’s denting luxury e-tail sales and will persist even after the cost-of-living crisis is a distant memory.

He said: “People have really started using C2C options over the past 12 months, particularly Vinted. Collect+ says [Vinted] now accounts for a significant share of their volume. If you can get premium brands on there, secondhand but still in good condition, I think that creates real competition for these types of brand.”

And of course, the same goes for the many higher-end resale sites, such as Vestiaire Collective, where a shopper might be able to pick up a mint condition Dior Bar jacket (RRP £3,500) for around £1,200, or a product from a smaller brand for maybe 20% of its new price.

Physical bounce-back

We can’t ignore the fact that physical retail has sprung back to life in a way nobody expected. Demand for luxury spaces on streets like Bond Street, Avenue Montaigne, Via Monte Napoleone, Fifth Avenue, the Dubai Mall and more is strong. Retailers from the giant luxury department stores to individual brands are pulling out all the stops to get shoppers through their doors and they’re also linking their physical stores to their online ops to create omnichannel experiences that pureplay e-tailers (or even almost-pureplay e-tailers like Matches or Farfetch through its Browns ownership) can’t compete with. 

This means e-tail faces huge challenges even without its company-specific issues. As Mulcahy told us: “There’s no question the [online] market is in a real state. Following the pandemic, [in the UK] we’ve had two years of declining growth (-10% in 2022, -3% in 2023) with a forecast of 0% for this year [but] January started off -7%. Health & beauty is doing really well, most other categories are struggling and fashion is among the worst. Growth came in at -6% in 2023 for clothing, against a forecast of 0%.” Those figures are likely to be repeated across many key luxury markets.

Brand relationships

All of that creates huge pressures for e-tailers and stocking the right brands is crucial if they’re to have a chance of success. The sector had huge troubles in the early days attracting brands that thought online simply wasn’t the right environment for them. And some issues persist. Only recently, END. Clothing’s parent company reported annual results in which it said was “impacted by the withdrawal of franchises from key brands”.

Brand relationships were a problem at Matches too and when Sky News broke the story of the administration filing, it said some labels had started to cut their ties with the business over late payments issues and requests for discounts.

As for Farfetch, before the company was sold, Richemont said its brands wouldn’t be opening the expected e-concessions on the site, while Neiman Marcus and Kering both cut ties. In fact, the owner of Gucci, Saint Laurent, Balenciaga and more said recently that e-commerce overall had fallen as a percentage of the group’s total sales and Kering’s direct brand exposure to Farfetch was limited. That was a bad sign not just for Farfetch but for luxury e-tail in general. It meant one of luxury’s key brand owners was essentially saying e-commerce wasn’t that much of a priority for it.

Logistics

It’s not all about brands as slick logistics operations matter too. Logistics problems at luxury names have also shown that the high-end isn’t immune to the problems that have hit purveyors of more affordable products like Boohoo, ASOS and Dr Martens.

Again, END.’s experience is an extreme example of this. In the year for which the aforementioned results were filed, it reported problems linked to a new automated fulfilment system that caused a logistical nightmare and essentially got in the way of both the company and customers having a smooth ordering experience.

Its new stock system that was meant to improve inventory management didn’t work out as planned. Action to minimise the impact on customers meant it had to cut marketing and promotional activities to slow website traffic. Actively discouraging shoppers from buying isn’t a recipe for growth!

Over-confidence

When Frasers Group bought Matches, it said the latter has “incredible relationships with its brand partners” and “we are confident that, by leveraging our industry-leading ecosystem, we will unlock synergies and drive profitable growth”.

Yet in putting it into administration weeks later, it said Matches “has consistently missed its business plan targets and has continued to make material losses. It has become clear that too much change would be required to restructure it, and the continued funding requirements would be far in excess of amounts that the group considers to be viable”.

It was clearly over-confident in believing it could easily fix problems that had seen off multiple CEOs and a deep pocketed private equity owner in just a few years.

For Farfetch, the hubris was more about the leadership team’s huge ambitions for the business that saw it moving beyond its founding formula into areas in which it had less expertise.

Having gone to a presentation in London by José Neves in its very early days over 15 years ago, I remember being blown away by the basic Farfetch concept. It seemed an inspired idea to be the upscale marketplace that helped put the inventory of hundreds of small stores in front of many millions of global consumers.

But the decision to become one of those retailers by buying Browns, the move into brand ownership via the €550 million New Guards Group acquisition, the Stadium Goods buy, the tech link-ups with external brands and retailers, the costly launch into beauty and rapid retreat from the sector, all came as investors who lost confidence in a business that was morphing into something different than the one they’d bought into.

Farfetch may have been the UK’s fastest-growing retailer in 2017 (in an OC&C Strategy Consultants and Financo retail growth index) after 70% growth, but it’s a long time since it and peers like Matches and YNAP could boast such figures. The big question remains whether the current crisis is an existential one for giant luxury e-tail operations. Coupang seems to think not after its Farfetch buy, but YNAP’s owner Richemont still appears undecided and Frasers has made its position very clear!