Richemont is finally offloading Yoox Net-a-Porter. Or at least taking a big step in that direction.
After months of negotiations, the Swiss luxury conglomerate announced Wednesday that it had reached a deal to spin off the loss-making e-commerce group in a joint venture with Farfetch, which is acquiring a 47.5 percent stake in YNAP as part of a complex agreement that contains provisions for a full acquisition within a few years.
Investors and analysts welcomed the news, hailing the transaction as a win for both companies: Richemont shares closed up almost 3 percent, while Farfetch’s stock price jumped 21 percent, lifting the platform’s market capitalisation to $3.6 billion.
What does the deal mean for Richemont, Farfetch, YNAP and the wider luxury e-commerce sector? BoF makes sense of the deal and what it signals.
Why is Richemont Selling YNAP?
Yoox Net-a-Porter, which operates e-tail sites Yoox, Net-a-Porter, Mr Porter and The Outnet, has been the problem child of Richemont’s portfolio for a while now.
Richemont first purchased Net-a-Porter in 2010 for about $550 million, spinning it out in a merger with Yoox only to buy back the combined entity at a €5 billion valuation in 2018.
But rising competition, legacy technology and the cost of running a luxury e-commerce player at scale proved too much to manage for the Swiss group, whose expertise lay in watches and jewellery rather than digital technology. A bungled tech and logistics upgrade was hugely expensive for Richemont, and hastened the departure of key clients using Yoox’s white-label e-commerce solution, including Kering and Moncler.
In recent years, what was once one of the hottest players in e-commerce has generated steep losses, dragging down Richemont’s valuation even as its brands like Cartier and Van Cleef & Arpels soared.
Richemont doesn’t break out financials for YNAP, but its Online Distributors Division, which also includes smaller pre-owned watch platform Watchfinder&Co, made an operating loss of €210 million for the fiscal year ending March 2022, 6 percent narrower than the year previous. (Sales for the division hit €2.8 billion, up 27 percent year-on-year.)
With little internal expertise to turn around the unit, Richemont has been itching to get the loss-making company off its balance sheet instead. Talks between Richemont and Farfetch over a YNAP deal were first reported in October last year.
Pressure to announce progress on the deal has ratcheted up as LVMH invests heavily in its recent acquisition, Tiffany & Co. — potentially challenging Richemont’s dominant position in watches and jewellery — as well as by the arrival of an activist investor, Bluebell Capital Partners, which has demanded changes to the company’s governance as well as recommending the group divest from non-core activities like e-commerce.
The arrangement with Farfetch “enables the Richemont portfolio to return to a pure play luxury group,” RBC analyst Piral Dadhania said.
How Is the Deal Structured?
The deal is broken down into two phases. The first phase will see Farfetch acquire a 47.5 percent stake in YNAP from Richemont, while the Emirati business mogul Mohamed Alabbar will acquire a 3.2 percent stake, helping to bring Richemont’s stake below 50 percent so it can deconsolidate the unit in its financial reporting.
Rather than cash, Richemont will receive shares in Farfetch, valued at around $440 million at the time of the deal, which it has agreed to hold as an investment; in five years, it will receive another $250 million in Farfetch shares.
An implied valuation of €1 billion for YNAP — far lower than what Richemont paid, as well as below recent estimates — means the group will claim a €2.7 billion write-down on the asset.
The transaction, which is expected to be completed before the end of 2023, leaves YNAP without a controlling shareholder. But the tie-up lays a path for Farfetch to acquire the rest of YNAP, with options in place for Richemont to sell Farfetch the remaining shares if YNAP achieves profitability (measured by adjusted EBITDA) within three to five years.
The deal was structured this way to ensure all shareholders are invested in a successful turnaround, Neves said on a call with investors Wednesday. If the full acquisition doesn’t happen, YNAP could be sold to a third party or put up for an IPO, Neves said.
What’s in It for Farfetch?
First and foremost, Farfetch is set to solidify a dominant position in luxury e-commerce as a result of the deal, increasing its market share in the space and adding over $3 billion in gross merchandise volume to its marketplace.
In this highly competitive niche, Farfetch will enjoy added scale through its exposure to the deep well of clients at Net-a-Porter, Mr Porter, and Yoox, as well as gain access to those websites’ trusted, aspirational brands (something Farfetch has struggled to build) for a significant discount compared to what Richemont paid back in 2018.
Another coup for the platform will be the addition of Richemont’s portfolio of strong brands like Cartier, Van Cleef & Arpels and Jaeger-LeCoultre to its tech ecosystem, as the group announced a deal with Farfetch’s B2B unit, dubbed “Platform Solutions,” alongside the transaction.
Now, Richemont’s portfolio of brands will migrate to using Farfetch’s white-label services to power their digital capabilities, including logistics for their e-commerce websites and rolling out more robust omnichannel, the companies said. The brands will also sell their products on the Farfetch marketplace using an e-concession model.
“This seems [to be] an excellent deal for Farfetch,” said Bernstein analyst Luca Solca, noting that the addition of Richemont e-concessions to the Farfetch platform would be a “very welcome boost to traffic generation … of which Farfetch had an acute need.”
Before the deal, Farfetch counted more than 20 top brands and retailers as white-label clients, including Chanel, Harrods, and LVMH-owned JW Anderson. The tie-up with Richemont sees the first major conglomerate joining its platform, and potentially unlocks the “hard” luxury market where Farfetch is severely under penetrated (watches and jewellery account for just 3 percent of sales). The tie-up could also bolster the company’s credibility as a go-to technology platform for luxury names more broadly.
What Does This Mean for Yoox Net-a-Porter?
The deal will allow YNAP to replatform its websites to Farfetch’s technology and logistics systems, replacing legacy technology that lagged heavily behind industry peers.
Farfetch has also touted services like inventory management tools and sophisticated global logistics network, which would help YNAP to keep up with rivals while reducing its dependence on hefty investments from Richemont.
Beyond the replatforming, Farfetch is coming to the table with fresh ideas for how to take the different properties in the YNAP umbrella forward.
Net-a-Porter and Mr Porter will remain curated destinations focused on serving full-price luxury consumers. But behind the scenes, the replatforming of both sites will coincide with rolling out a hybrid wholesale-marketplace business model, with Neves pledging to make it easier for top brands to convert to operating e-concessions on the sites.
Off-price emporium Yoox will be repositioned as “an end of cycle and circular fashion destination” by adding resale to its offer, Neves said. Farfetch will also migrate end-of-season stock from its platform to the site, helping boost the portion of full-price items on the main marketplace.
Leadership of YNAP’s brands will remain united under one CEO, who is set to be appointed after the first phase of the deal is complete, the companies said, replacing current chief Geoffroy Lefebvre. A new board of directors will include three members each for Farfetch and Richemont, as well as a seat to be appointed by Alabbar.
What Does This Mean for the Luxury E-Commerce Landscape?
The deal marks a major consolidation in the hyper-competitive and challenging luxury e-commerce sector, where price competition, high customer acquisition costs and logistical challenges make it difficult to turn a profit. It also further solidifies a dominant position for Farfetch in the space.
To be sure, scale doesn’t necessarily make these challenges disappear: Farfetch, like everyone else in multi-brand e-commerce, will still need to compete with brands’ own websites and stores for both customers and inventory. But broadening its consumer base through YNAP’s sites and adding key clients to its B2B arm will help Farfetch to keep outspending rivals as it seeks to become both the dominant tech provider and marketplace for luxury brands.
Further tie-ups could occur involving remaining players such as Ssense, Matchesfashion and MyTheresa, who might look to bolster their market share and reduce back-end costs in a similar fashion.
YNAP’s sale at a reduced valuation could also be seen as yet another blow to the wholesale model, which dominated the first wave of luxury e-commerce.
The distribution system that powered the luxury industry for decades — where retailers order inventory from brands and mark it up — has been in decline as brands seek higher margins at retail while cracking down on discounting by third-party sellers. At the same time, a new generation of e-commerce players has sought solutions to the inventory risk and high working capital requirements endemic to wholesale.
Farfetch has been a champion of the e-concession set-up, where brands keep the inventory and are able to control pricing and assortment on the site themselves.
Wholesale players like Matchesfashion, Mytheresa, and Net-a-Porter recently started integrating e-concessions into their business models, too, but have mostly limited the arrangement to a handful of brands. Commissions websites can charge for e-concession are usually much lower than the typical markup for wholesale, and the arrangement also sees the sites ceding some control over curation.
Farfetch’s plan for YNAP will push the industry’s shift to e-concessions forward — the latest sign that these days it’s big brands, not retailers, who hold the power in luxury.
