Six Years On, Farfetch Answers Johann Rupert’s Call for Collaboration
LONDON — Is a United Nations of fashion e-commerce finally taking shape?
It’s been six years since Johann Rupert, Richemont’s founder, chairman and principal shareholder, asked industry colleagues and competitors to join him in creating a “neutral” digital platform for fashion built around Yoox Net-a-porter — but it came to nothing.
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Now, post-COVID-19 and against an internationally competitive — and costly — backdrop for online retail players, the industry finally appears to be answering that first clarion call.
On Friday, Richemont confirmed it is in late-stage discussions with Farfetch about creating an open and shared platform with YNAP to sell fashion, luxury and high-end jewelry.
If it comes to be, the new site will have a broad shareholder base and no majority owner. It will leverage the tech firepower of Farfetch, and see brands including Cartier and Van Cleef & Arpels — in addition to myriad fashion names — join a new iteration of the Farfetch marketplace.
According to Rupert, other industry players are ready and waiting to put their cash on the table, invest in the new platform, and start selling their brands on it, too.
During a call to discuss Richemont’s robust first-half results, Rupert reminded financial analysts that in 2015, during a Financial Times conference, he shouted out to members of the industry — but nobody answered.
“I asked — in fact I beseeched — other industry players to join us on a neutral platform, stating that I didn’t think that even the biggest player could do this alone, because it would take too much money.
“I said that we needed an industry effort. In those days I was looking west, at Amazon, and east, to Alibaba,” Rupert said shortly after Richemont reported a 20 percent sales gain of 8.91 billion euros, and a 44 percent surge in profit to 1.25 billion euros compared with 2019.
Asked why the platform he originally envisioned took so long to take shape — and why it’s happening now — Rupert said the reasons were many.
“On both sides you want to trust the other person implicitly. And you also have to trust in the technology. I also think the COVID-19 experience and the switch to online [during the pandemic] made everybody realize how important a channel that is. I think the COVID-19 situation made it apparent that the industry needed a neutral platform,” he said.
Rupert added that the advanced talks with Farfetch were not the result of shareholder pressure and he declined to comment on whether Daniel Loeb’s hedge fund Third Point had taken a stake in Richemont.
“We’ve been signalling this [deal] for a year now, so it’s not activist pressure or anything like that. We started a long time ago, and maybe some investors read properly what we were doing — and invested. We can’t comment on Mr. Loeb, but I think he clearly took us more seriously than you guys did,” Rupert told the analysts in his typically frank manner.
Rupert described the new platform as an evolution of the mega-alliance that Richemont, Alibaba and Artemis forged with Farfetch last November.
The aim of that alliance is to provide European luxury brands with “enhanced access” to the China market, and to fuse physical and digital retail at a time when more people are shopping online, yet still hungering for in-store experiences.
As part of the deal, Farfetch launched on Alibaba’s luxury platforms in China.
Alibaba and Richemont each invested $300 million in Farfetch Ltd. via private convertible notes, and plugged an additional $250 million each into a new joint venture called Farfetch China. They have a combined 25 percent stake in the entity that includes the current market operations of Farfetch.
Rupert described Loeb as “a very sophisticated investor. He did what anybody else could have done, which is to buy shares. And good luck to him. He made money.”
Richemont shares jumped as much as 5.2 percent on Monday after reports that Loeb had invested. On Friday morning, Richemont shares were up 9.25 percent to 134 Swiss francs. They closed up 10.9 percent at 136 Swiss francs.
Richemont said the scope of its discussions involve Farfetch investing directly in YNAP as a minority shareholder, with other investors to be invited to participate alongside; YNAP leveraging Farfetch Platform Solutions to support its ongoing transition to a hybrid business model; the Richemont brands leveraging Farfetch technology to accelerate their online retail developments, and Richemont brands joining the Farfetch marketplace.
Rupert said that while YNAP has always pursued a “linear” business model, with Net, Mr Porter and Yoox owning the merchandise they sell and holding the inventory, the time is right to explore alternatives, such as a marketplace model, which wouldn’t require YNAP to hold inventory.
Analysts welcomed the talks with Farfetch, but that’s not surprising as they’d been agitating for Richemont to list, spin-off or sell its loss-making YNAP division.
Even in the strong first half, Richemont said that its online businesses recorded higher sales, but a stable EBITDA loss due partly to the new, temporary absorption of Brexit-related custom duties and VAT.
“Considering the weakness of YNAP, this [Farfetch] news will be well received by the market, and we would expect the shares to be up this morning on the back of the beat in earnings, and news around YNAP,” wrote Carole Madjo of Barclays in a flash report following the results.
Luca Solca at Bernstein argued once again that separating Richemont from YNAP “would create material shareholder value” at Richemont, and added that YNAP “is bound to remain a drag on company results in the short-term, while synergies with the rest of the business are minimal.”
RBC Capital Markets echoed its peers saying that if the deal between YNAP and Farfetch is finalized, and a neutral platform is created “it should, over time, allow for Richemont to return to a pure-play luxury business, enabling potential further valuation re-rating given the quality of its core jewelry and watch brand assets.”
One investor, who asked not to be named, said the new platform proposition is a win-win for YNAP and Farfetch. The investor said that by teaming with Farfetch YNAP’s “trajectory and potential will be accelerated” and Net, Mr Porter and Yoox will eventually become “more profitable, and less cash-intensive.”
The person added that the ultimate prize for Farfetch will be a chunkier slice of the partnership forged with Richemont and Alibaba last year. “Farfetch will have greater control over the China story. And China is the biggest growth story going forward.”
Morgan Stanley said much the same, calling the potential YNAP/Farfetch partnership “a major win” for both sides. The bank said the deal would solidify Farfetch as “the preeminent technology partner in the luxury industry; provide Farfetch with a potential $150 million to $400 million, high-margin revenue stream, and see the arrival of Richemont’s brands on the Farfetch marketplace.
On Friday, Farfetch confirmed it was in discussions with Richemont “in relation to a potential expansion of their existing Luxury New Retail strategic partnership,” and shareholders were certainly happy. Farfetch shares were up 20 percent to $46.58 in late-morning trading.
On Nov. 18, Farfetch will report its third-quarter earnings, and there is speculation in the market that the company could reveal some fresh details about the upcoming deal.
Rupert declined to talk about the look and feel of the new open platform. When asked how jewels by Van Cleef & Arpels might appear to customers, he demurred, saying it would be a “seamless” experience.
“We will have to look at it brand by brand, product by product. We found during COVID-19 that people did a lot of studying online, so that when they walked into the boutique their conversion ratios went up because they knew what they wanted,” he said.
Rupert added that the aim is for people to find luxury products “anytime, anywhere, on any device. We are really quite far behind China, for instance, in terms of online shopping and the online experience, and we are learning an enormous amount in China and from our partners and Alibaba.”
Rupert said Alibaba has also taught the Richemont teams much about digital marketing in China, including “shoppertainment.”
Richemont’s chief has long rejected criticism of YNAP and its place in the Richemont portfolio.
He said that while Richemont may have made mistakes by pursuing a “linear model” of buying and holding stock, YNAP’s losses are “not that important” compared with total operating profit — and the growth in operating profit — of the group overall.
In the first half, Richemont posted an operating profit of 1.95 billion euros, a 331 percent increase on 2020 and a 67 percent rise versus 2019.
He does not view the potential deal as a way of dumping YNAP. “This is not a spin off. This is not a carve out. This is the realization of a dream of some six years ago. It follows two years of both sides realizing that we’d like to do the deal, and then finding a way to do it that would meet both our demands.”
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In addition to being a long-held ambition for Rupert, the new platform — if it comes to fruition — highlights a new spirit of cooperation among the big brands, and Richemont in particular. In addition to forging the China-focused retail alliance last year with Alibaba, Farfetch and Artemis, Richemont also has also teamed with its competitors with regard to transparency and sustainability.
Richemont’s biggest brand Cartier is now a member of the Aura Platform, developed in 2019 by LVMH Mo?t Hennessy Louis Vuitton, in partnership with Microsoft and the New York-based blockchain software technology company ConsenSys.
Cartier is one of many luxury brands promoting the platform’s blockchain technology, which acts as a passport for luxury goods. Blockchain allows for full transparency about sourcing, manufacturing, history, where an item was originally purchased, and when it is offered for resale.
On Friday, Rupert did not limit himself to commenting on the bombshell news of a new alliance with Farfetch.
Indeed, he offered up rich, thoughtful commentary on a variety of topics ranging from Richemont’s first-half sales and the company’s future to Chinese President Xi Jinping’s call to achieve “common prosperity” to the special role that luxury companies must play in the field of sustainability.
He rebuffed ongoing speculation that Richemont might merge with, or sell itself, to Kering.
“We are close to the Kering people. But Richemont is not for sale, and we are not interested in merging. We believe in our own businesses; we believe in our performance going forward. Why should we dilute our shareholders, all of our shareholders, when we think our growth could be better than the other businesses in the foreseeable future?” asked Rupert, who owns a little more than 9 percent of the group’s shares but a majority of the voting rights.
And, similar to what Burberry said earlier this week, Rupert voiced his support for China’s “common prosperity” program. He does not see it as a threat to Richemont or to luxury goods purchasing going forward.
Rupert pointed out that China’s president “did not say ‘stop consumption.’ What they’re against is a vulgar display of the disparity in wealth. If you look at the economics of China, it has been an investment-driven economy, and they are not backing off the drive to have consumption growth.
“They wanted to calm down the vulgar displays, and the dopamine effect of children being addicted to being online all the time. Both of these are very, very popular decisions in China,” he said.
Rupert also touted Richemont’s sustainability strides, confirming that the Science Based Target initiative has validated the group’s plans to reduce greenhouse gas emissions in line with the 2015 Paris Agreement.
He added that Richemont has also committed to eliminating the use of polyvinyl chloride, or PVC, from all its products and packaging by December 2022.
Rupert believes that luxury has a very specific — and challenging — role to play in the pursuit of sustainability.
“We should, as the luxury goods industry, be very, very careful what we’re doing. We are incredibly fortunate. Sometimes we act like heroes, but quite frankly, we are not that special, and quite frankly, we’re not necessary. If you’re talking about energy, electricity, food production, where do we come on the food chain? Stone last.
“We had nice-to-haves, so we have to be especially careful about our carbon footprint, what products we use in our manufacturing process and quite frankly, society and investors will not tolerate any slackness from us as luxury goods producers.”
Rupert said Richemont “will do the right thing. We should all be asking ourselves many, many questions,” he said.
As reported in July, Richemont is pursuing a “green growth” agenda that aims to increase profitability while shrinking its carbon footprint, and is working toward circularity in sourcing and sales.
Its 2021 sustainability report, “Movement for Better Luxury,” sheds light on the grueling mechanics, costs and time it takes for a company of Richemont’s size and scale to go green.
And while Richemont has been publishing sustainability reports for the past 15 years, the July 2021 report marked the first time that the group asked EY to audit its processes, progress and adherence to the U.N.’s Sustainable Development, and other goals.
Rupert also spoke at length about the first-half results, and while they were muscular — with sales exceeding pre-pandemic levels — he typically sounded a note of caution about the second half, and beyond.
“The post-COVID-19 world is yet to emerge,” he said, adding that in the second half of the year, volatility is likely to persist, in terms of inflation and geopolitical tensions. He said the group will also face challenging comparatives with last year, and 2019.
“We look to the remainder of the year with vigilance and cautious optimism,” he said.
Richemont said it saw triple-digit growth in the Americas region and double-digit growth in other regions in the six months to Sept. 30. The company attributed the increases to a “customer-centric” and digital approach, to pent-up demand and money saved during the pandemic.
Rupert noted in his statement that direct sales to customers in the period accounted for 74 percent of group sales in the six months.
Jewelry was a top performer, notching a 67 percent rise in sales to 5.10 billion euros in the period. The watch division, which Richemont had restructured pre-COVID-19, grew 74 percent to 1.68 billion euros, with direct sales to clients approaching 50 percent. Rupert said “every watch maison participated in this notable improvement.”
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