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How Internet Economics Brought Down Matches and Farfetch

As fashion companies developed more connections with consumers, they lost the ties that held the industry together for decades.

Blame the internet or the human impulse to chase its flashing lights or something else. But big parts of the industry are unraveling, changing — going away or on to whatever comes next.

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Most recently and dramatically, it was the idea of the digital luxury department store, the multibrand merchant that carries a little bit of everything and lets shoppers browse in something approximating a refined experience.

If it was a model that seemed iffy before, it is near collapse now.

In just the past few months:

  • Matches was sold in a 52 million pound firesale only to end up in administration anyway, with its short-term owner Frasers saying, “It has become clear that too much change would be required to restructure it.”

  • Farfetch was plugged into South Korean e-commerce giant Coupang, which swooped in with $500 million to buy a company once valued at nearly $40 billion.

  • Yoox Net-a-porter seems to be out to sea again to find a new owner after its aborted deal with Farfetch. And owner Compagnie Financière Richemont has written off its value on its books.

  • Saks.com and Moda Operandi are both looking to raise money.

After 25-plus years, fashion is still trying to figure out how to move its business online — and make money doing it.

Models sport punchy vintage in honor of Yoox's pre-owned marketplace expanding.
Looks on Yoox’s pre-owned marketplace.

Yes, there are always some hot brands making money or a luxury powerhouse throwing its weight around, but for almost everyone else, the future is still fuzzy.

For the digital marketplaces, the problem is not just that luxury consumers have grown more cautious or that none of the multibrand players had the right digital bells and whistles — whether it be virtual try-on or the right kind of recommendation engine.

It’s deeper than that, rooted both in the structure of the industry and the economics of the internet.

First, the structural.

The natural impulse of the internet is to offer up choice — all kinds of choice in all kinds of places and all of the time. The e-commerce megalopolis of Amazon and Walmart serves up more options than Matches, Farfetch, Yoox, Saks and the rest ever could. And Google goes one-step beyond, connecting the dots between merchants everywhere.

The digital marketplaces can offer up an edit of the best brands with a specific point of view and build something of a loyal base. But that’s hardly what the tech crowd would call a moat for the business model — especially when the brands themselves are courting consumers directly.

And today’s online shoppers aren’t just targeted, they’re laser targeted, trained that they can go after exactly what they’re looking for and find it somewhere on the web.

Experience counts for something, but when it comes to finding something with a keyword or grabbing from one’s social scroll, the digital luxury platform’s experience isn’t enough.

And then there’s the economic problem that sits at the center of the luxury multibrand universe.

While the digital platforms can grow some scale, they have to keep spending to build back end capacity and keep up with the demands of shipping out more individual orders and processing all those online returns.

Department stores could make do with fewer distribution centers handling bulk shipments and gain a little more edge. In fact, the O.G. department stores had a business model that benefited from a certain amount of inefficiency. They guessed what consumers wanted, took big shipments from brands, sold what they could at full price and marked the rest down. And then, they went back to the brand to get a little bit of a discount if they didn’t make quite as much margin as they were expecting.

For their trip to the department store, shoppers got access, assortment, maybe some help from an associate and a sale at the end of the season — or even during the season. The brands kept their factories busy and grumbled over the end of season chargeback payments to retailers, but not so loud that they lost their hold on the real estate.

In their heyday, the physical department stores also offered near-exclusive access to certain brands for their markets — if you wanted the hot young designer, there were only going to be a few places you could go. That advantage is long gone both for department stores and for the online players.

Department stores could make money by controlling access and using a cadre of glossy magazines to help drum up and shape demand.

There was an industry-wide ecosystem that, for better or worse, kept fashion together and left space for players up and down the supply chain to eke out profit.

The digital platforms had none of those advantages the department store of old enjoyed and so Matches and Farfetch, however much noise they made at one time, might never have had a chance. The digital players don’t seem to have been able to create businesses that actually turn a profit, while department stores have a long history of operating in the black, even if margins and growth aren’t as strong as what Wall Street would like to see.

Matches building on 5 Carlos Place in Mayfair.
Matches on 5 Carlos Place in Mayfair.

And brands are now are driving their own demand directly, using their social channels to drive shoppers to their own e-commerce platforms or their own stores. Fashion often doesn’t make a lot of money selling online, but brands are less willing than ever to share a piece of the sale away to another retail player.

It’s a set of circumstances that leaves many brands in the industry still searching for a clear path forward.

Where’s a brand on the rise to go? If the digital marketplaces fall short, e-commerce and retail are both expensive propositions without tons of scale and physical department stores are struggling themselves.

Macy’s Inc. is sparring with an activist. The Nordstrom family is said to be thinking about trying to take Nordstrom private again. And Saks Fifth Avenue parent Hudson’s Bay Co. appears to be getting close to buying Neiman Marcus, a consolidation that would pressure designer brands all the more.

Fashion needs a new path forward.

The Bottom Line is a business analysis column written by Evan Clark, deputy managing editor, who has covered the fashion industry since 2000. It appears every other Thursday.

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