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The Business of Fashion Podcast
The Great Luxury E-Commerce Reckoning
00:26:27
Mytheresa CEO Michael Kliger and Moda Operandi co-founder Lauren Santo Domingo joined BoF founder and CEO Imran Amed at BoF VOICES 2024 to share their insights on the future of luxury e-commerce.
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- [00:00]
Lauren Santo Domingo
Foreign.
- [00:04]
Imran Ahmed
Hi, this is Imran Ahmed, founder and CEO of the Business of Fashion. Welcome to the BoF podcast. It's Friday, November 29th. This was the year of the great luxury e commerce reckoning. Giants have fallen, fortunes have shifted and the online luxury landscape has been completely altered. It all started in 2000 when Net A Porter and UXE were founded in the UK and Italy, paving the way for an entire industry to explore its relationship with e Commerce. By 2010, there were multiple luxury e commerce players competing on both sides of the Atlantic. Financial investors wanted a piece of the action. They poured billions of dollars into these companies. Matches Fashion was acquired by Apex Partners at a reported $1 billion valuation. Farfetch raised more than a billion dollars in venture funding and then raised $885 million during its IPO. During COVID Farfetch'd stock rose to an all time high, achieving a market cap of more than $26 billion. And then everything changed. Three of the luxury industry's biggest e commerce players were in big trouble. Late last year, Matches Fashion was acquired by Frasers Group in a fire sale at a fraction of its Apex valuation. But the business wasn't viable and went into administration in March 2024. Meanwhile, Farfetch's share price plummeted by 98%, bringing the company to the brink of bankruptcy, only for it to be rescued by South Korea's Coupang. As a result, the long mooted merger between Farfetch and Yuk's Net A Porte was now on the rocks. Richemont had to find a new owner to get YNAB off its books, extending a years long effort to offload the struggling business and taking write downs totaling almost €4 billion. What happened?
- [02:05]
Michael Klieger
I mean, high level of debt and inflation and high interest rates, you have a problem, suddenly you need cash. A model that was never cash producing. So I think many companies were just not prepared for that something like that could happen. And I think, did we know this was going to happen, this sudden slowdown in aspirational demand? No, but I think we were well prepared.
- [02:30]
Lauren Santo Domingo
We saw private equity enter our space. I think, you know, a lot of really clever guys in suits thought how hard could this be? And you know, maybe approached it with the same way as say they had success with a grocery chain in Canada. Suddenly the thought that they could apply that logic to fashion because the product is seasonal, of course. And we saw that that is not.
- [02:53]
Imran Ahmed
The case this week on the BoF podcast. I'm pleased to share a timely conversation from BoF Voices 20 MyThereza CEO Michael Klieger and co founder and chief brand officer of Moda Operandi, Lauren Santo Domingo examining what went wrong in the luxury e commerce sector, how they are navigating the ongoing luxury slowdown and what comes next. Plus, we get the lowdown on Michael's plans for mytheresa's post merger integration of UXE Net a porte a deal which is expected to close in the first half of 2025. Here's Michael Klieger and Lauren Santo Domingo on the BoF podcast.
- [03:42]
Interviewer
Well, let's get into it. Before we talk about all of the stuff that you guys have been working on in this extremely complex operating environment, I want your very quick take of what you think went wrong. I went through some of it very quickly. But what were the maybe one or two things that you think were most significant? Michael, let's start with you.
- [04:06]
Michael Klieger
I think you summarized well what happened in terms of the outside pressures. And if I have to distill it, many companies were just not prepared for that something like that could happen. And I think did we know this was going to happen, this sudden slowdown in aspirational demand? No, but I think we were well prepar no debt, high variable cost and understanding which customers are profitable, which are not. So we had to react like anyone else. And we did react, but we were at least better prepared. I mean high level of debt and inflation and high interest rates, you have a problem, suddenly you need cash, a model that was never cash producing. So I think the essence was we had to deal with all the pressures also and we felt them, but we were more prepared.
- [04:59]
Interviewer
But do you think the underlying business model, like leaving aside some of these external factors like inflation and high interest rates and you know, high levels of debt that some of these companies had taken on the underlying business model, you still believe in it?
- [05:13]
Michael Klieger
I absolutely believe in it because there is a consumer that wants to shop like that. It's like in the late 80s every airline in the US was in chapter 11 but no one said will people fly? Of course they fly. But the players at that time hadn't understood what the customers want. And then there came some new entrants. And so there is a huge demand of professionals working less time. They want to consume luxury, they want to buy it. I think we are in a cycle. There's not a structural challenge. But as a company that wants to serve customers, you need to find the right model and to fine tune. And if you had it yesterday doesn't mean you have it tomorrow. And that's the traditional game. So I don't declare that online luxury is over. On the contrary.
- [06:03]
Interviewer
Okay, Lauren, what's your take?
- [06:05]
Imran Ahmed
What went wrong?
- [06:05]
Interviewer
You have a different vantage point, Smaller business, maybe had to navigate some other challenges because some of the investors, the types of investors that I mentioned, were invested in your business. What went wrong from your point of view and how have you navigated the last 12 to 16 months?
- [06:25]
Lauren Santo Domingo
Well, our focus has always been connecting the best designers with the best customer. Understanding the customer, understanding the industry has always really been at the core of what we do. And I think we saw private equity enter our space. I think, you know, a lot of really clever guys in suits thought, how hard could this be? And, you know, maybe approached it with the same way as say they had success with a grocery chain in Canada. Suddenly the thought that they could apply that logic to fashion because the product is seasonal, of course, and we saw that that is not the case. And the people that really know this business and this industry and understand this customer are the ones that are going to succeed.
- [07:09]
Interviewer
So given that you're both clearly believers in this sector, I want to know what you're doing now to withstand some of this pressure. There's still a depressed market when it comes to aspirational customers. There's still kind of consumer shock from high prices. Prices on average have increased across the board for aspirational customers around the world, like 20, 25%. So what are you doing now, Michael? We'll talk about the merger in a minute. But in terms of the operating model of Mytheresa, which ever since I met you, I was always really taken with your focus on long term value of customers. Talk to us about that.
- [07:49]
Michael Klieger
I mean, exactly what Lauren just said. It's the customer. You need to know who the customer is, what they want, and then cater to that. And it is, of course, shifting, changing, but it's the customer. And we have, I believe, done a very good job in defining who we want to serve, the ones that consume more, but particularly more regularly. And we have seen that this customer is very resilient. They're very demanding. We see at the moment that these customers want more experiences than ever, be it in the way they live their life, sort of the amount of clothes and accessories we sell for going on vacation has doubled. But they also expect from us more experiences than just access to product. We are very privileged in serving these top 3%. They are resilient. I mean, the mood is good. Stock market's up. Real estate, except for Asia, is stable. Commodity prices are up. So it's not that they're not willing to spend, but you have to be attractive. You have to create desirability. And that is the essence. If you pin it down to financials, it's exactly what he said. You can invest a ton of money in attracting customers and entertaining customers as long as you have the customers that over a long period of time, spend. And since 2015, I mean, we have a cohort model. The cohort of new customers of 2015 are still each year spending more for the last nine years. So this cohort that we attracted in 2015 in totality is still growing. And if you have a model that works like that, you can still screw up, but you're fundamentally in a good position.
- [09:48]
Interviewer
So you once told me this story, Michael, and I'm probably not going to remember it exactly right. So correct me if I'm wrong, but there was this excessive investment that a lot of these companies made in customer acquisition, search marketing, social marketing, all that digital marketing. And because they were all competing against the same search terms in the same places, the price of that marketing grew. Yeah, but you looked for signals. Your company, Mytheresa, you found signals of knowing which customers to target. Like what were you looking for in those early interactions with potential customers that helped, you know, they would be a cohort that would be still spending nine.
- [10:28]
Michael Klieger
Years later, as I said, I mean, you can spend a lot of money in customer acquisition costs, which is largely online marketing, if you get the return, if you get the stickiness of customers. So the logic that we applied from the beginning, we are not bidding for traffic. I mean, I hope no one does anymore. You're not bidding for revenue. Many companies still bid for revenue. We are bidding for customers. And so our whole attribution logic and bidding landscape, technical landscape, we rebuilt in 2017. I mean, our average CAC is about €170.
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Interviewer
Can you explain what CAC is to everyone who doesn't know?
- [11:07]
Michael Klieger
I'm sorry, I'm so into it. Customer acquisition costs. So in that lingo, how much do you spend until someone buys? And so the average customer acquisition cost is 170. You can spend 100 on a pair of sneakers and you have revenue, but that customer statistically will not buy again. And you can pay 500 to acquire someone that buys a jacket, double dressed cashmere jacket. That customer will come again and again. And this is just too little. You ask for triggers, what type of products people buy. If someone buys a bag, interesting. An expensive bag has very little predictive power. Whether this is a returning Customer or not. Because a bag can be the one time indulgence in luxury, or it could be the 15's bag. But there are products, there are payment methods, there are addresses, time of day, shipping methods. We build a model, an algorithm, before AI was a word and it's feeding all on this and is looking for triggers what correlates with a big ltv lifetime value. And this is how we organize the whole company, not only in bidding, in services and operations, in the warehouse. That is what we try.
- [12:29]
Interviewer
I love this because it's the science, the left brain side of retail. But another thing that deteriorated a lot over the last five or six years with a lot of these luxury e commerce retailers is the right side, the curation, the creativity. You could log into these websites and they all look the same. They had all optimized around the same product page, the same, everything looked the same. So to the customer they were indistinguishable and interchangeable. So they would just go where the cheapest price was. You could find all the same products, all the same brands, all the same stuff. So the only way to compete was on price, which led to discounting. Lauren, talk to us at Moda Operandi. One of the things you pride yourself on is curation. Talk to us about the importance of curation in the future of luxury e commerce.
- [13:20]
Lauren Santo Domingo
Well, I think going back to grocery and a lot of times like the big retailers, the experience of shopping for clothing is the exact same of shopping for your groceries. It's just an endless scroll with the same fonts and it lacks any sense of individuality. So what we really pride ourselves on is differentiation. You know, my Teresa is very much like the North Star in our industry for a beautiful, well run company, great service. So for a small retailer like us, where we really win is on differentiation. So we lean into curation, we lean into design, young designers, emerging brands. Two thirds of our designer assortment are new brands. And then from there, you know, we really lean into storytelling. We have beautiful photography, editorial and you know, that's why the brands want to be with us, because we are brand enhancing. We will connect the best product with the best customers and at the end of the day we have the finest customers in the world. So I think that's why everyone keeps coming back.
- [14:25]
Interviewer
Talk to us about your customers because you know, I was talking in the intro about that small cohort of customers that both you and Michael have kind of gone after, but in very different ways. You have this model which was kind of a pioneering model in the industry which was to sell, based on Fashion Week, to do trunk shows like the ones that people would do in the pre digital era, where if you were lucky, you could go meet a designer and order clothes in advance. That is a nice experience for your customer, but it also gives you interesting information that you can use elsewhere in your business. Talk to us about that.
- [14:59]
Lauren Santo Domingo
So, yes, we do 600 trunk shows a year. That's a big differentiator for us. So the Runway shows happen in New York, London, Milan, Paris, where there we're photographing the collection and then we make it available to our customer. That's an incredible customer acquisition tool because it's a very small subset of women who are going to want to shop the most expensive pieces from the Runway, pay for it six months in advance and wait for it. So right there, without an algorithm, without an AI, we know that's the best customer. And with that, it also gives us an incredible amount of data. It was actually Imran who, you know, really was the one who was encouraging us to use the data that we were getting from trunk shows. So within seven minutes of a collection going down the Runway, we can tell which styles are going to hit in which colors, in which sizes, in which regions. So when we take that information and we use that to inform our inventory buy, that inventory is going to sell through significantly higher. That leads to much less waste at the end of the season. Therefore, we are not a promotional business. We focus on full price sales. We are a full price business like that. We have had the healthiest margins and sales in the last six months that we've had in our entire existence. And it's really this flywheel of information we can layer on top of that, you know, a hybrid marketplace where then we are taking items from a designer's marketplace, putting that on top so we can be incredibly conservative with inventory, but be able to provide the best assortment and curation that exists.
- [16:45]
Interviewer
We'll be right back with more on the BoF podcast.
- [16:51]
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- [17:35]
Interviewer
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- [17:42]
Michael Klieger
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- [17:43]
Interviewer
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- [18:39]
Interviewer
It'S really interesting to hear both of your strategies because there's similarities and differences. You made it through this slowdown, but we have to talk about what's coming. Michael, your big news last month, this is the first time you're talking about it in a public place. So I have the opportunity to ask you a few very quickly.
- [18:58]
Michael Klieger
You didn't know.
- [18:59]
Lauren Santo Domingo
When you do I get to ask. I didn't know.
- [19:01]
Interviewer
I didn't know, but I had an inkling might happen and so it just worked out nicely for us. But in a quick one minute, the rationale for the deal to take on Ynab, which growth is slowing, unprofitable, really complicated tech infrastructure. How do you make that work?
- [19:24]
Michael Klieger
I mean, that's another question. Why did we do the deal? And it comes back to what both of us believe. It's the customer. And despite all the problems that has been written about the challenges that the business is facing, if you talk to customers, and I talk to a lot of customers, NET A Porter. Mr. Porter, there are still amazing brands. There is loyalty, there is love and emotions. These were the pioneers in our sector and in a different way, but in the same way Yoox, I mean Yuke's was started 25 years ago. They were the absolute pioneer of doing off season online. And so the reason we feel this is a unique opportunity is because there are these powerful brands that stand for Something and I can only compliment you, Moda stands for something. There is a clear differentiation in these three brands. They stand for something. And we are fundamentally convinced that we can make this work because the issue is not in the front, the issue is in the back. There are technological challenges, there is a level of complexity that is mind boggling. I think the approach the company took was to manage complexity. We will try to reduce it instead of managing it.
- [20:45]
Interviewer
Can you talk to us a little bit about that because I understand that part of your plan. There was this massive replatforming that happened at UX Net Importe Group where they moved all of the businesses onto the same tech stack. And one of the things I understood was that actually the tech stack that they built wasn't great for full price. Mr. Porter Net a Porter type businesses and it's not necessarily ideal for the Yuke's off price business either. So how are you solving this technology problem? Because this is like actually one of the most costly, challenging things to do.
- [21:21]
Michael Klieger
You're absolutely right. And just let me know it's not approved yet. So it's a pending deal. I have to.
- [21:26]
Interviewer
I said that in my intro.
- [21:28]
Michael Klieger
So our idea is, and I think the landscape you described is even more complex because that infrastructure, that joint infrastructure they created was also intended to serve the services part. So with the same technology they were and are serving other people's online shops. So maybe on paper, maybe not even on paper it made sense, but it's just not workable and you need to separate, you need to give the different businesses the tech stack they need because then you can reduce the complexity. It has been announced already that the services business is going to end. I mean that has been initiated before even that transaction was agreed. And by separating we can provide the off price business a much slimmed down, streamlined solution. And then of course the big question for any investor was what do you do with a luxury business? And there we have of course this huge strategic advantage. We have a tech stack, we have an infrastructure that serves a luxury business. And even though it is very different in positioning, the fundamental feature needs are the same. So the vision, the idea which is a difficult exercise is to bring the luxury part, the Netapult or mistapulter onto our platform that we have developed, that we have launched last year in April. It's running like a charm and it's a two to three exercise. We have not been shy about it when we announced it to our investors, that part. But then we believe it will really unlock a power and focus it's really about focus. Focus on your business, focus on your customers. And today there's so much energy going into the back instead of the front end. Exciting customers, inspiring customers. Hopefully that's the one we will solve for.
- [23:20]
Interviewer
Lauren, you said you had a question for Michael.
- [23:24]
Lauren Santo Domingo
You're probably not going to be able to answer it. I was wondering how do you plan to differentiate the different titles?
- [23:33]
Michael Klieger
Good question. No surprise. The first basic fact and we have announced that is we will keep these companies separate. Separate buying teams, separate editorial teams, separate marketing teams. We are highly curated, which is great to our customers. We only carry about 250 brands and womenswear but it comes with a cost and it should because otherwise you're not differentiated. We are not the website to go for emerging talent. We have a great curation of established brands. If you look for emerging talent, Netaporta has about 800 and emerging talent is not contemporary. It's also luxury. There are fantastic designers, young designers that do in terms of fabrication, in terms of material, amazing luxury products. But they're not on my Teresa, but they should be on Netaporta and are and will be. The other point is Netaporta because of Natalie has this strong voice, this editorial leadership always. That's actually not what my Teresa does. We serve a customer that is so product focused and wants to immediately go to the product. And these are just two examples that we will fight defend because when they become similar, we didn't achieve anything. We actually lost a lot of money.
- [24:55]
Interviewer
I have time, I think for one last question. Michael, I want to leave it with you. In my work as a management consultant, I worked on a lot of post merger integration. It sounds as bad as it is. One of the challenges with the Yuksnet a porte merger was a cultural clash. The two cultures were so different. You're now bringing together ux which has its culture. You're bringing together Net a Porter and Mr. Porter which very much has the culture of Natalie and all of the kind of legacy that she left. And you have Mytheresa. What work are you doing in that kind of post merger integration? On the soft side, I understand all the tech infrastructure. I understand the plan to keep the brand separate. But how do you make it work from the human perspective?
- [25:43]
Michael Klieger
I mean, if people ask me what keeps you up at night, it's actually not the tech. I have great technical engineers, I trust them. We will solve that. What you just mentioned is also when you look into the history of Yuke's Net and Porter, that was and is the biggest challenge. And it is respect, it is communication, it is relationship building. It is the right balance between fast and slow. It's all of that which there is no mechanical textbook on that. It's people. And our business is not only in the customer side people, it's also on the employee side people. It's a people business. It's about emotions. I mean, no one needs what we sell, but they wanted. So it's an emotional business. And that I don't give you the 10 steps because I don't have the 10 steps for this cultural integration. With the one remark. We don't want to integrate the cultures. We want to respect the different cultures because they feed the different brands. We want a company that has some operating principles, some values, but we believe there is a logic for a cultural advantage being founded and run in Bologna. I mean, UX is a Bologna company and it's scrappy and it is aggressive and was always that. And it's a Bologna culture. And if you think about Netaporta and Mr. Porter, it is Natalie, but it's also London. And then you have Maitreya, so don't even start. Okay? I put that all in a blender. Something very non tasteful will come out of that. Respect it, but still provide a framework. We want to be one company and we want to have everyone together.
- [27:39]
Interviewer
Three beautiful wines all behind the same bar. I look forward to tasting that wine. I'm really grateful to both of you for sharing that. I mean, it is a lot to have navigated this environment and I think we all learned a lot from this conversation. So thank you very much. The BoF podcast is edited and produced.
- [28:05]
Imran Ahmed
By Olivia Davies and Eric Brea.
- [28:16]
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