During the COVID-19 pandemic, apparel and footwear e-commerce saw a significant increase in sales as restrictions and store closures forced customers to turn to online shopping. In fact, during this time, online sales penetration soared from 20% in 2019 to 32% in 2021. However, since restrictions were eased, in-store shopping has rebounded and, accordingly, the share of online sales has fallen below 29% by the end of 2023. This has left many luxury online players under pressure of slowing or declining sales. These pressures have been further exacerbated by the cost of living crisis, which has led many consumers to limit discretionary spending, as well as rising operating costs and high interest rates, which have led to lower financial support as investors shy away from these platforms due to a lack of confidence in their future viability and potential profitability.
Luxury e-commerce giant collapses amid sluggish sales and rising losses
During the peak of the pandemic, giants like Farfetch and Matchesfashion saw impressive growth, some of them achieving their first profitable quarters, sparking a frenzy of these e-commerce platforms finally entering the online luxury business. As a result, these companies reached unprecedented valuations, with Farfetch reportedly valued at $23 billion in early 2021 and Matchesfashion reportedly acquired by Apax Partners for $1 billion in 2017. Fast forward to 2023 and the situation is quite different, with the former needing a rescue by Coupang in a deal that included a $500 million bridge loan to Farfetch to avoid bankruptcy, and the latter being acquired by Frasers Group for just $63 million, only to be placed into receivership shortly thereafter.
In reality, the unique circumstances brought about by the pandemic — namely, the massive increase in online sales — only served to hide a major weakness in these companies’ business models: As consumers returned to brick-and-mortar stores and overall spending was subject to inflationary pressures and high interest rates, these e-commerce companies faced mounting losses.
Omnichannel strategies and intensifying competition from second-hand sales
Luxury e-commerce players are also facing increasing competition from omnichannel strategies from both brands and brick-and-mortar retailers. Indeed, as luxury consumers return to in-store shopping while still enjoying the convenience of e-commerce, brands are investing to create a seamless bridge between consumers’ online shopping experience and in-store customer service, adopting true omnichannel models and a more customer-centric, personalized approach. This is driving brands to focus on direct-to-consumer (DTC) strategies at the expense of online and offline third-party wholesalers to gain more control over their image and pricing power.
At the same time, fashion companies face stiff competition from a booming second-hand market, fueled in part by leasing platforms such as TheRealReal and Vinted, which cater to the needs of both budget-conscious and environmentally conscious consumers.
This trend is highlighted by survey results, which reveal that the proportion of respondents who buy second-hand goods at least every few months will increase by 25% between 2019 and 2024, to over 37%.
Source: Euromonitor Voice of the Consumer: Lifestyle Survey, January-February 2024
Despite the bleak outlook, paths to progress remain
The exact balance between online and offline sales is still evolving, while the industry is plagued by uncertainty about consumer preferences. The recent receivership of MatchesFashion shortly after its acquisition by Frasers Group highlights the challenges of navigating this landscape; Frasers Group said the decision was due to a turnaround that was more demanding and resource-intensive than expected. Similarly, Richemont’s Yoox Net-a-Porter is still waiting for a buyer, on the back of the failure of Farfetch. Meanwhile, big players such as Amazon considering entering luxury e-commerce are remaining surprisingly cautious. These developments suggest that expectations for luxury marketplace companies are fading and that the efforts required to turnaround may outweigh the potential benefits.
Still, amid the uncertainty, there are some possible paths forward, one of which is represented by Mytheresa. Mytheresa has a strong financial performance. Despite a challenging environment, this German luxury e-commerce platform has thrived by focusing on its most affluent customers. During the company’s second-quarter presentation in February 2024, CEO Michael Krieger emphasized that the company’s definition of “top customers” – those who spend close to or more than six figures per year – represents 3.8% of all customers and accounts for about 40% of the company’s sales. Mytheresa achieves this through highly targeted marketing efforts, including unique in-person experiences offered to high-spending customers, such as frequent exclusive events held in collaboration with luxury brands such as Valentino and Dolce & Gabbana.
Conversely, as luxury brands such as Gucci and Hermes intensify their focus on premium customers through strategies such as exclusivity and price hikes, it creates an opportunity to better engage with aspirational consumers who are squeezed by inflationary pressures and looking towards more affordable brands and price points. To this extent, luxury online retailers may be more inclined to work closely with the latter, especially start-ups, and enter luxury online commerce platforms to expand their presence and enhance their brand positioning.
Additionally, there has been a noticeable shift towards selling second-hand goods, driven by the desire for brand prestige and quality, but also the motivation to cut costs. Partnering with second-hand platforms provides e-commerce businesses with an opportunity to capitalize on this trend while increasing customer retention. For example, in June 2023, fashion e-tailer Giglio.com partnered with Vestiaire Collective to allow customers to trade-in products from 50 select brands. As part of the integration, users can provide product details, receive price offers, and exchange products for store vouchers through Giglio.com.
Luxury e-commerce platforms will likely continue to function, but to thrive, they will need to rethink their business models and reinvent their strategies to meet the changing needs of post-pandemic consumers, as well as compete with brands’ evolving DTC omnichannel strategies.
Read our report, “Channel Change in Luxury and Fashion,” to learn more about the new opportunities industry players can leverage for their omnichannel and e-commerce strategies.
