According to the antitrust ruling from the European Union on October 23, Farfetch can proceed with its acquisition of a 47.5% stake in Richemont-owned fashion e-commerce company Yoox Net-A-Porter.
At the time the potential deal was announced in August 2022, Richemont chairman Johann Rupert said the acquisition would be a step towards his ambition of building an “independent neutral online platform for the luxury industry”.
The E.U. decision was one of the biggest contention points holding up a deal that’s set to unify tech-forward e-commerce company Farfetch and traditional luxury goods company Richemont. Antitrust rules typically prohibit agreements between market operators like Farfetch and YNAP that would restrict competition and abuse a dominant position in the market.
In January, the U.K. Competition Authority also brought a claim against the deal, which was cleared in March. Both rulings have allowed the deal to go through, albeit on very different grounds from what was proposed last year.
In August 2022, Farfetch’s shares rose 24% following the announcement, and its market cap hit $26 billion. A year later, in its second-quarter earnings report on August 17, the company reported a year-over-year quarterly revenue decline of 1.3% to $572 million. As of August 2023, Farfetch’s share price had plummeted 83% year-over-year.
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The issues facing the e-tailer appear to come down to some of the same issues that are affecting the wider luxury market, including a slow return of the Chinese customer and low spending in the U.S. E-tailers, in particular, have had mounting issues. For its part, Matches launched an outlet in October amid flat sales, while Ssense let go of over 100 employees in February. As of August, Farfetch is planning to restructure and downsize its London office, and it’s been offering hefty marketplace discounts according to analyst sources.
“Farfetch lacked the initiative to control its spending and budgets, which ultimately led to an increase in expenses and a decrease in its stock price, despite its increase in sales,” said Michelle Delker, CFO of financial advisory company The William Stanley CFO Group. Farfetch spent $675 million in 2019 on the acquisition of contemporary fashion company New Guards Group, which houses brands including Off-White and Palm Angels. “In the last year, the losses from exchange rates compared with trade prices and spending are not made up with their ongoing sales.” Farfetch did not respond to comment requests ahead of this story’s publication.
Delker added, “They [faced] a perfect storm over the last year by dealing with the suspension of trade in Russia in 2022, Covid-19’s restrictions of trade in China and changes in the delivery schedules of spring-summer 2023 collections.”
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Considering the state of Farfetch, analysts expect that Richemont will renegotiate the terms of the agreement.
“The deal is less financially attractive to Richemont than it was when it was announced 14 months ago,” said Bryce Quillin, economist and brand strategist. “The 90% decline in Farfetch’s share price during this period has pushed down the value of the deal from over $600 million to less than $150 million.”
The conditions of the acquisition are also changing. Quillin said that Richemont would now take a larger write-down on YNAP as the value of the deal is weaker. “If they complete the deal, Richemont may escape a cloud of uncertainty that has hung over its head since the deal was first announced, which has most likely dimmed investor appetite to hold Richemont shares,” said Quillin. The uncertainty is about whether Richemont’s YNAP is even profitable. “It is likely that Farfetch, with its current balance sheet woes and slow growth, will be unable to acquire the remainder of YNAP.”
Finally, there is the issue of technology. Farfetch was a pioneer in luxury e-commerce, including by introducing Farfetch Platform Solutions in 2015. The service has since powered relaunched websites for brands including Reebok and Manolo Blahnik.
“Richemont will need to transfer its online business to Farfetch technology, which will benefit Farfetch but is an operational challenge for Richemont,” said Quillin. “[Should the deal pass,] the luxury goods group will need Farfetch to succeed and that may ultimately necessitate stepping in at a later stage to ensure that Farfetch, which has never turned a profit, can right the ship.”
Digital commerce players like Farfetch were winners at the height of the pandemic. In the first quarter of 2020, when luxury retail sales were down worldwide because of COVID-19 shutdowns, Farfetch’s revenue increased 90% year-over-year to reach $331 million across its four reporting segments. Now the market is different, with a return of retail and customers hungry for experiences.
“For the wider industry, this deal points to the general uncertainty in digital distribution markets,” said Quillin. He said Farfetch is important across the sector, especially for the smaller brands including Coperni, Jacquemus and Off-White, the last of which it holds licensing rights for. “Further destabilization at Farfetch raises concerns for all of the digital fashion commerce ecosystem.”
