Bankruptcy of luxury brands puts business model in doubt – 03/30/2024 – Market

Rosh Mahtani, founder of jewelry brand Alighieri, is celebrating her company’s 10th anniversary this year. Her handmade gold-plated pieces, inspired by Dante Alighieri’s “Divine Comedy,” have made her a winner of the Queen Elizabeth II Award for British Design and a fixture on luxury e-commerce sellers.

During Paris Fashion Week last month, buyers flocked to its showroom to select pieces for the upcoming season, including from MatchesFashion, a leading multi-brand fashion retailer responsible for around half a million pounds, or US$630,000 (R $3.2 million), of Alighieri’s projected revenue. But there was a problem.

“They owed me £70,000 [cerca de US$ 88 mil ou R$ 440 mil] on unpaid invoices since October and were asking for discounts on these pieces,” Mahtani said last week. That made her uncomfortable, even though such bargaining was increasingly common for independent brands like hers. Still, she said she wasn’t shaking at the bases.

“The team made a selection, and we talked about a collection for the summer [inverno no Brasil]” she said. “I don’t think any of us had any idea what was coming next.”

Days later, MatchesFashion went into administration (the UK term for bankruptcy). Its owner, Frasers Group, which bought the company in December for around 52 million pounds ($66 million or R$330 million), has now said the operation was not commercially viable. Overnight, almost half the team was laid off from a company that had been valued at US$1 billion (R$5 billion) when it was sold to Apax Partners in 2017.

Today, 200 brands are owed money and can’t access unsold stock, and an angry customer base complains online about how to access orders or make returns.

The implosion of MatchesFashion was the latest case of companies selling luxury goods online going out of business. Once beloved by investors, many are in financial freefall. In December 2023, Farfetch, a longtime e-commerce powerhouse for independent boutiques and beloved of the luxury giants whose sites it powered, avoided bankruptcy thanks to a last-minute acquisition by South Korean electronics trading group Coupang and a loan of US$500 million (R$2.5 billion). In 2021, Farfetch was valued at US$40 billion (R$200 billion).

Portuguese José Neves, founder of Farfetch, resigned as CEO in February amid a series of lawsuits filed by shareholders. The future of Yoox Net-a-Porter is also at stake following a failed deal between Richemont, its parent company, and Farfetch last year.

Richemont, which listed Net-a-Porter as “discontinued operations” in its most recent balance sheet and has taken billions of euros in writedowns on the company, said it is looking for a buyer and will not invest any more money. When contacted, Richemont, Farfetch and MatchesFashion refused to comment.

For much of the last decade, luxury e-commerce has been hailed as the smart way to shop, offering trendy brands, exclusive products, free returns and 90-minute delivery services at the click of a button.

Physical stores would certainly collapse. The future was clicking “Add to Cart,” whether it was for fashion priced at $50 or $50,000.

In the early years of the pandemic, consumers spent on these sites. More recently, questionable management choices, a volatile global economy and rising luxury prices — and with major brands investing heavily in their own digital operations — have restricted retailers’ ability to stand out in a competitive market, let alone turn a profit.

“In the end, what cannot sustain itself will fall, and online merchants need to have lower, more practical ambitions,” said Luca Solca, luxury analyst at Bernstein.

Fashion infinite scroll

Multi-brand e-commerce emerged at a time when the global luxury market was shifting from exclusive to ubiquitous. The novelty and excitement of being able to browse and buy beautiful things that will soon arrive on your doorstep appealed to a consumer accustomed to the immediate gratification of the internet age.

But something curious about online luxury e-commerce was how many companies adopted a broken model, something reflected in the much-publicized problems of department stores in the United States. After the pandemic boom, many were left with excess inventory and were left with mountains of unsold inventory.

Then they resorted to aggressive promotions and discounts. This has led major brands to seek more control over their e-commerce and distribution. As competition became fiercer, multi-brand sellers sought to find a difference by spending more and more. More brands and more products in more geographic regions. More sales.

In addition to the exorbitant expenses required to build the infrastructure to ship all those orders — and process all those free returns — it was a model that undermined much of what had attracted consumers in the first place.

“Many consumers came to these sites because they wanted fast, smart part editing and instant access,” said Fiona Harkin, director of forecasting at consultancy Future Laboratory. “In the end, and especially with the rise of internet commerce, dozens and dozens of pages of products that could probably be found elsewhere would turn into an unsatisfying, endless scroll of fashion.”

These challenges coincided with a general decline in the luxury market and aligned with the exposure of many e-retailers to middle-class consumers who have seen their spending constrained by inflation and the upward trajectory of luxury prices. Solca estimated by 2023 that the top 5% of luxury customers accounted for more than 40% of sales, including at luxury e-tailers. In other words, an even more fickle and demanding customer to win over.

Some companies have tried to expand their business strategies with expensive acquisitions. Farfetch owns British luxury store Browns; Italian incubator New Guards Group, which licenses Off-White and beauty retailer Violet Grey, is currently in talks to sell these assets. The emergence of resale has led to customers purchasing second-hand products shortly after they become available at full price.

“The cost of successful digital marketing and customer acquisition skyrocketed, and investors were increasingly unwilling to bear the costs,” said luxury market consultant Robert Burke. He noted that some companies, like MyTheresa, have fared better than others. However, he warned that the past three months have brought a painful reset that was long overdue.

“We’re about to see a major evolution in luxury e-commerce — or perhaps a better word would be correction,” Burke said. “Overall, online sales of luxury fashion have increased over the past year. This is not a market in decline. What is changing is who is getting the pieces of the pie.”

On the verge of bankruptcy

For JJ Martin, founder of lifestyle brand La Double J, the reason she had a ready-to-wear business was because of MatchesFashion founder Ruth Chapman, who started selling the La Double J in 2016.

“At the time, everyone looked to Matches to figure out what to buy because Ruth had the best eye, nose and ear in the business,” Martin said last week. “When she chose me, it was my big break. They didn’t have every brand, just the coolest ones. That was the biggest asset of these sites before they started selling seven variations of the same thing.”

Martin owes money for a resort collection (mid-season) that he sent last fall (spring of last year in Brazil), although he refused to disclose the value. Dozens of brands contacted by The New York Times for this article, many of which had already sent spring (fall in Brazil) collections for 2024, also remained silent. Anissa Kermiche, beloved by fashion insiders for her ceramic Love Handles vases shaped like women’s hips and butts, as well as her jewelry and homewares, was more direct. She owed £50,000 ($63,000) on stock delivered after Christmas.

“I have no hope of getting that money back,” Kermiche said. “It’s a lot, but others owe much more and are on the verge of bankruptcy.”

Poppy Sexton-Wainwright, of swimwear and loungewear line Asceno, emphasized that she was less concerned about the “not insignificant funds” owed to her than the loss of earnings she expected to make this year from MatchesFashion. Several brands said they moved as much money as possible to their own direct-to-consumer sites. Which is fortunate, given reports that shoppers at some online stores, including Ssense, a Canadian company still known for its focus on emerging and independent brands, have reduced the number of brands they are buying from.

Others, including Net-a-Porter, have asked some brands to change their payment terms to 90 days instead of 60, making an already unstable industry even more nervous. As Farfetch searches for a buyer for Browns, Richemont searches for one for Net-a-Porter, and administrators search for a savior for MatchesFashion, the future of once-star names is uncertain.