Alibaba’s cave of treasure
The Richemont Group is teaming up with Chinese online sales giant Alibaba for a major investment in Farfetch, to open up new luxury channels in China. This deal reflects the acceleration of the digitalization of sales, but it could definitively shift the strategic center of gravity of luxury goods from Europe to China.
By Béatrice Peyrani16 novembre 2020
A supernova in the luxury universe? The Swiss Richemont Group, world's number two in luxury goods (Cartier, Van Clef & Arpels, Chloé…), has formed a strategic partnership with the Chinese number one champion of online sales Alibaba. In a capital-intensive agreement, they will together be pouring investments into the British portal Farfetch (1.15 billion dollars for starters). Could this be the Big Bang for a whole new luxury universe – one in which in the center of gravity of the luxury industry will be China, and not Europe?
What is this unprecedented cooperation agreement all about?
Step one: Richemont and Alibaba each committed to investing $300 million in British online fashion retailer Farfetch. Meanwhile, they are also each investing another $250 million in Farfetch China, a new joint venture in which they will each hold a 25% stake, and which will start operations in the first half of 2021. Evidently Farfetch's position in the luxury market has attracted the attention of these two big names.
Created in 2007 by the Portuguese businessman José Neves, a fashion enthusiast, Farfetch had sales of 1.3 billion dollars last year.
Listed on the New York Stock Exchange in 2018, the company has a stock market valuation of 14 billion dollars (despite results in the red since 2016), thanks to a portfolio of 1300 brands sold in 190 countries and 2.1 million customers. Average age of buyers: 36, with 25% under 30.
But perhaps the biggest selling point of the e-commerce site is its glamorous and "glossy magazine" look, appreciated by fashionistas and expected to be equally appealing to… the Chinese!
Step two: Alibaba and Richemont will be able to exercise a 24% purchase option on Farfetch China in the next three years, to increase their respective stakes up to 49% each.
Meanwhile, in the next few days Alibaba will be launching Farfetch channels on its three existing luxury platforms in China: Tmall Luxury Pavilion (200 ultra-prestigious brands, including Cartier), Luxury Soho (past collections of premium brands and young designers’ brands) and Tmall Global (cross-border market place).
Consequences: This will put Farfetch’s channels just a few clicks away from 757 million Chinese consumers, some of them with very high incomes and very little shame. One famous example: the record sale of 100 Maserati that were snatched up in 18 seconds on Alibaba in 2016. That should put the idea that China’s e-commerce market is stuck in the digital stone age to rest!
Since its creation in 1999 by a former English teacher, Alibaba, the Chinese number one brand in online sales, has come a long way. This mass market giant boasts 74.5 billion euros in turnover over the last 12 months and its market capitalization now stands at 612 billion euros. But in terms of luxury, Alibaba is just getting started.
China, a golden market
According to Alibaba's CEO, the Chinese market is expected to account for half of global luxury goods sales by 2025, thanks to hundreds of millions of "digital native consumers". These are young people between 20 and 30 years old who live in the ten Chinese “megacities”, cities with more than ten million inhabitants (by comparison, Europe and the United States only have nine such cities between them ) and who do not always have access to major brand flagship stores. Ultra-connected, they spend a large part of their time shopping on their smartphones.
Thanks to them, this year China became Richemont's first market ahead of the United States – a real revolution. if not an outright coup in the luxury world. In 2020, when travel has become difficult and stores are hard to visit, the Alibaba-Richemont alliance to boost online sales in the country with the largest demand worldwide makes sense. "The COVID crisis with its millions of store closures around the world has been a huge shock. This has stepped up the pace of e-commerce strategies originally designed to be rolled out in three years to three months," explains Violaine Gressier, head of the luxury division of Facebook France.
Not surprisingly, Artémis - the parent company of the French luxury group Kering (Gucci, Saint Laurent, Bottega Veneta…) is already a Farfetch shareholder and wants in on the deal too – it’s about to drop an additional 50 million dollars on Farfetch shares. It only makes sense that in light of all these maneuvers, the CEOs of Richemont and Kering will be gathering around a boardroom table alongside the bosses of Alibaba and Farfetch.
In addition to the desire to maximize commercial continuity between mobile applications and boutiques, what other initiatives from the two luxury groups, which have been competitors until now, can be expected? Some analysts speculate that we might soon see a Kering-Richemont group, which could become a real challenger to LVMH.
But in the short term, more likely would be to expect other reorganizations: in 2018 Richemont launched its own e-commerce company "Yoox Net-a-Porter" (YNAP), and while sales are growing, it hasn’t turned a profit yet. However, the platform is already available at Alibaba, so is there a new future dawning for the platform, and what synergies could it bring to the table?
Share value is going up
In the meantime, the markets clearly appreciate the acceleration of Richemont and Kering's digital strategy. In the one week since the announcement of the deal, the two stocks have jumped more than 30% and nearly 20%, respectively, from their prices at the beginning of November. Farfetch's share price has risen by 396% since the start of the year. in mid-March, before COVID, its stock was worth $5.99 and is now trading at over $44. By way of comparison, an old-world company that has been hit hard by COVID, Air France, is now worth only 1.7 billion and has lost 60% of its market capitalization in one year, its share price going from 11 Euros to 2.60 euros at the end of October.
"Farfetch may indeed one day become the Amazon of luxury… or maybe not," says Gilles Pouzin, founder of the financial expertise site Deontofi.com. Alibaba could always swipe the stake. The Chinese platform recently broke a new sales record on November 11, “singles' day” in China, with more than 63 billion euros’ worth of goods sold, including 400 pieces of Cartier jewelry.
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