YOOX-NET-A-PORTER & Online Luxury Distribution Models | In Practise

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YOOX-NET-A-PORTER & Online Luxury Distribution Models

Former Chief Operating Officer at YOOX NET-A-PORTER GROUP

Why is this interview interesting?

  • How brands approach off-price and full-price online distribution
  • The evolution of YOOX and value of owning logistics in luxury retail
  • How Net-a-Porter serve extremely important luxury clients
  • The disruption of the internet as a demand-driven distribution channel versus physical retail
  • How luxury brands are under pressure and losing control of distribution online
  • The challenge in Farfetch's marketplace unit economics
  • The threat of Amazon and what Alibaba do so well in China Luxury

Executive Bio

Alberto Grignolo

Former Chief Operating Officer at YOOX NET-A-PORTER GROUP

Alberto has over 20 years of experience in online luxury as one of the first 10 employees at YOOX. Alberto is the Former Chief Operating Officer and led the company through the merger with Net-a-Porter and was involved in the sale of the merged entity to Richemont, the leading luxury brand house. He now spends his time investing in fashion businesses and consulting with multiple luxury brands on various online go-to-market strategies. Read more

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Interview Transcript

Alberto, can you provide some context to when you joined YOOX and your role and responsibilities?

I joined YOOX in the fall of 2000. Back then, the company had just been founded. It had been founded in April that year and went live at the very end of June. I joined in October, so the site had only been live for about three or four months. We were made up of about 10 or 12 people and I was 27 when I joined. Up to that point, I had worked in the university department where I had graduated and I joined as a data analyst. Today, you would probably call it a data scientist.

What was the core value proposition of YOOX?

YOOX came from an idea from the founder, Federico Marchetti, who was a young man. He was about five or six years older than me and he had been working in banking for two or three years, in Italy; he was with the Italian team of Lehman Brothers. He was exposed to the strength of the business model of the fashion industry. In 1998, he moved to the US, to do an MBA at Columbia and one of his teachers was a board member of Bluefly, which was one of the early players in the fashion e-commerce industry. He realized that he had an opportunity to build something similar, in Italy.

When he finished his MBA, he came back to Italy and he understood it was time for him to move on in his career and become an entrepreneur. He thought that there was an opportunity in fashion and e-commerce. E-commerce was in its infancy; Amazon was six years old and he knew that e-commerce wasn’t as developed as in the US. He thought it was too early for people to purchase, full-price, online, but we could define a proposition whereby we sell the excess inventories of brands and retailers online, for high fashion products. This would provide a benefit to companies, because it would allow them to offload excess inventory, in a way that did not conflict with their retail distribution. It would also be of benefit to customers, who would have the opportunity to buy high-end merchandise at a discount.

He thought of a way of doing that that would position the project as far from the usual discounter as possible. He decided to go live with the end of season products. It would be at reduced prices, compared to the recommended retail price, but we would not provide a comparison with traditional recommended retail prices. Our proposition was not that we will be 50% off compared to other retail. Our proposition – which was the company’s original claim – was that great fashion never dies. You can buy a Bottega Veneta bag, which is five years old, and you have a piece of fashion that has had a longer history than the one that is just off the shelf at a retailer, but not necessarily a less worthy one.

The original proposition was to facilitate the contact point between supply and demand of online fashion, focusing on excess merchandise, but not selling it as a discounter. It was being sold as an avenue for pieces of fashion which had a stronger appeal than simply being lower cost. It was the idea of endless fashion.

Was that crucial, in the early days, to get the brand engaged with listing online?

It was absolutely crucial. E-commerce and the internet were perceived as being very conflictual with retail distribution. It was important to come up with a proposition that brands would not fight against from the very beginning. From his time as a banker, he had good relationships with both the Armani Group and Diesel Jeans Group, who both believed in the project, not as investors, but as suppliers. So in 2001, we started on the excess inventory of the Armani Group and then in 2001, we did the same with Diesel Jeans. From then on, little by little, things started to get a bit easier.

What was the biggest barrier to driving adoption with the brands, in those early days?

Back then and maybe even now, the issue for brands, with regards to e-commerce distribution, was that their model, in physical retail, is so successful. Fashion brands tend to be very profitable companies. High fashion brands can have EBITDAs which are anywhere between 20% and 50%. They have a strong brand equity which, to a degree, is the strongest asset in their balance sheet. More and more, they have grown up, over the last 20 years, in having very expensive physical retail exposure, from direct investment. This was a distribution channel which was not necessarily complying with their distribution and brand policies, which was slightly out of their control, in a market like the internet, where it’s easy for customer to decide to go and buy their merchandise and what price to pay for it. It was more of a demand-driven distribution channel, as opposed to their supply-driven distribution channel. This was always seen by some brands – and is still seen, to a certain extent – as a threat to their positioning, to their brand equity, to their investment in physical retail. Also, to a degree, a threat to those assets that they had in their balance sheet, including the brand equity that they had invested into.

Have you seen that approach from the brand side, to out of season stock, change over the years?

YOOX moved from the off-price proposition pretty fast. In 2004, we started working with both Armani and Diesel, in setting up an online, full price distribution. After a couple of years, we launched armani.com, powered by diesel.com and YOOX. Increasingly, as this became a significant portion of the business, we ended up managing Dolce & Gabbana, Valentino, Moncler, several brands in the LVMH stable and practically all of the Kering Group brands, with the exception of Gucci, online.

The point is not exactly how the perception of brands evolved, in the context of distribution, but how it evolved in terms of, more broadly, the internet as a distribution channel. A huge difficulty that brands face is that retail prices, in the physical stores, in the fashion world, tend to be very strictly regulated, where you have a recommended retail price for the assortment of each brand, in each country. Ideally, each country has its own peculiar retail positioning for the same item. You also have a very strictly regulated calendar for markdowns and sales.

What happened, more and more, and what is still happening is that even though fashion is such a profitable environment, where there is scope for promotions, without hurting the P&L very much, was that even what you might call the full-price distribution online, tended to become more promotional than the retail sort of is. This is very much true for Farfetch which, from this model, made the strongest lever for their growth. But it’s too early for everybody to bid. To give you an example, it’s generally true that markdowns online start maybe a few days earlier than in the physical stores. If you go to buy an item online, in China, you will find it from an authorized retailer at prices that are lower than in the physical stores of the brands.

Basically, brands do still have some big difficulties in being able to cope with this mechanism, which blends full-price to what, traditionally, was off-price distribution. Simply put, the internet, being a demand-led distribution channel, doesn’t allow there to be the protection of margins that physical stores, with all their inefficiencies, allowed. It was possible to have the same item on sale, in a store in London and in a store in Paris, at different prices, because a customer in London would never go to Paris to buy that item at a cheaper price. But if you are buying online, that is definitely possible. There is still a portion of conflict, from which is very difficult for brands to get away from. The starting point is always the same in an industry which is very profitable, where there is room for the market to eat into the price point, without the supply side of the equation stepping back its offering. But the brands also acknowledge there is a huge element of opportunity. The rift between the opportunity and the channel in these environments is what made the internet and e-commerce for fashion so meaningful and also vice versa.

How does that pricing work, online? Clearly, it’s more promotional; we do see discounts – Farfetch has been leading that – which drives demand. How does the brand structure or really look at the promotional pricing online?

It’s a very tough element for them to manage. Traditionally, imagine that you were buying an item from Dolce & Gabbana, as a third party, buying the product and reselling it as an independent retailer. You would have had a different price point or price list if you were Italian compared to if you were British or Chinese. You would have had strictly mandated windows for promotions. Not even the anti-trust regulations in Europe, which are normally designed to constrain recommended retail price strategies of producers, were able to affect it. Fashion is included in the sectors which are awarded peculiar treatment, due to selective distribution.

Given that you are in that position, you need to have a limited number of distributors and, legally, you are able to recommend retail prices. Traditionally, it was very clear. Whichever retailer was found out to have been messing around with prices, no matter if you were selling in bulk to a Chinese customer or an Italian retailer, anticipating markdowns and having merchandise on sale, at prices different from the recommended one, very simply, you would have been cut off the list of authorized retailers and you would not have been allowed to buy the merchandise in the future.

This has been completely messed up by the internet and I don’t think there is a way for brands to regain control. They have been trying, in a number of ways. They have tried to have consignment and third-party and marketplace agreements, whereby they keep control of inventory and force merchants to offer the products at a certain price point. They do that with Farfetch, but even there, it doesn’t work. This is simply because Farfetch will always keep their hands untied, in terms of offering one to one promotions. For example, if you subscribe to the Farfetch newsletter, you get a 20% discount on all the offerings, immediately. There is no way that Farfetch will stop doing that, because if they were not making these kind of offerings, they would probably cut their growth in half and they would not have any chance of being a viable business.

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YOOX-NET-A-PORTER & Online Luxury Distribution Models

September 2, 2020

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