European luxury labels’ distaste for discounts frustrates Farfetch ambitions

A winding down of the post-pandemic spending frenzy is hitting European luxury companies from LVMH (LVMH.PA) to Kering (PRTP.PA), but none more than Farfetch, an e-commerce pioneer.

Founded in 2007, Farfetch (FTCH.N) is one of the few global online retailers of high-end merchandise from a range of labels, such as a $5,690 Saint Laurent wool coat and a $5,900 white gold De Beers diamond necklace.

Lately, Farfetch has been touting discounts of up to 45 per cent off clothing and accessories from a number of smaller brands – Diesel, Balmain, Lanvin and Balenciaga among them.

Its shares plunged over 50 per cent on Nov. 28 after the company postponed its quarterly earnings report, saying that prior financial guidance “should no longer be relied upon”.

On Tuesday, Moody’s downgraded the company’s credit rating deeper into “junk” territory and put it on review for a further cut, citing its deteriorating financial position.

Farfetch’s woes reflect more than the economic headwinds dampening aspirational shoppers’ demand for new fashions.

Its longer-term challenge is a drive among labels to seek greater control of their products, usually at their own retail boutiques – a strategy aimed at avoiding discounts that third party retailers like Farfetch rely on to attract shoppers.

Powerhouse brands Chanel, Hermes (HRMS.PA), and LVMH’s Louis Vuitton and Dior have led the charge to control all aspects of selling their products, while Burberry (BRBY.L) is reducing the number of third party retailers carrying its products and upgrading its boutiques. It opened 33 stores including in Los Angeles, Tokyo and London in the first half of the year.

Kering, which owns Gucci, Saint Laurent and Balenciaga, also recently opened stores in those cities.

“It is a trend that brands prefer to control their own distribution,” said Caroline Reyl of Pictet, a Swiss multinational private bank and financial services firm that holds shares in Richemont (CFR.S) and LVMH, but not Farfetch.

By tightening their grip, also through shop-in-shop agreements in department stores, “they control everything, basically,” including pricing, shoppers’ data and brand positioning, Reyl said of the high-end brands.

Farfetch declined to comment when asked via email about the change in distribution trends.

The London-based company, which is listed in the United States, is working with JPMorgan and Evercore to explore options including a sale, two sources close to the matter have said.

Farfetch’s founder Jose Neves is considering taking the company private, according to the Daily Telegraph newspaper.

Farfetch and JP Morgan declined to comment. Evercore did not immediately respond to requests for comment.

DIVERSIFICATION AND COMPLICATION

Richemont, facing similar challenges to its online business YNAP, which includes Net-a-Porter, entered an agreement in 2022 for Farfetch to eventually take control of YNAP – a deal involving the transfer of Richemont labels to Farfetch technology.

Farfetch is not just an online marketplace. It’s also a tech company powering e-commerce for high-end UK department store Harrods, Italian fashion house Ferragamo, and is in the midst of doing the same for US department store Bergdorf Goodman.

Richemont on Nov. 10 expressed confidence in Farfetch technology, but said it would not inject cash into the company.

Farfetch and Net-a-Porter also seek to draw customers with exclusive offers from brands, with Farfetch recently offering early access to pre-spring looks like a 1,950 euro ($2,105) floral print dress from Dolce & Gabbana and Net-a-Porter selling a limited edition 1,700-euro wool skirt from Gucci, embellished with a horse bit, ahead of its official release this month.

But discounts, which labels fear cheapen their image, remain a key draw for shoppers of online marketplaces.

“Leading brands will be reluctant to engage, as they strive to implement high price discipline and stay away from promotions, while weaker brands will play ball,” predicted Bernstein in a 2019 note to clients.

Farfetch embarked on a diversification strategy that year, buying brands and licences to distribute them, like streetwear label Off White, through the acquisition of New Guards Group.

In 2022, it added a licence deal to distribute Reebok products and expanded into beauty with the purchase of Violet Grey, gaining control of products to potentially pull shoppers to its site – though it has since retrenched from beauty and said in August it was considering options for Violet Grey.

But slowing demand for luxury products in China and the United States complicated its efforts to turn a profit, while critics say the business has become too complicated.

Olivier Abtan, a consultant at Alix Partners, said that when a retailer is under heavy sales pressure, coupled with profitability issues, it could be tempted to increase discount levels – but that can become a vicious circle.

“In my experience, when a company is not doing well, peak seasons don’t help them improve, but rather tend to exacerbate the decline,” Abtan said.

($1 = 0.9264 euros)