Farfetch is to invest up to $200m (£153m) in Neiman Marcus as part of a wide-ranging partnership. What are the implications of this tie-up for the luxury sector as a whole?
- The deal gives Farfetch access to a US luxury physical retailer
- Neiman Marcus is investing $500m in tech over the next three years
- Reaching millennials and Gen Z luxury shoppers is one impetus for the tie-up
The decision by online player Farfetch to invest so significantly in luxury department store Neiman Marcus illustrates how important a market the US has become for luxury brands, especially following data showing that it has overtaken China for luxury sales.
GlobalData Retail managing director Neil Saunders says: “For Farfetch, the addition of Neiman Marcus gives it access to a physical retailer that has long had its finger on the pulse of US luxury.
“It will also allow them to learn more about how consumers shop across different channels – a possible prelude to them making further moves into physical or omnichannel retail.”
Demand for luxury goods soared in the US in 2021. A Bain report published last November found that the luxury recovery worldwide was powered by American shoppers.
“For Farfetch, being in physical Neiman Marcus locations can give their consumers a way to interact with products, boosting their confidence before making the purchase”
Katie Hansen, Mintel
Bain reported that these consumers accounted for a third of all sales in 2021, overtaking their Chinese counterparts who made up 23% of luxury purchases last year.
For Farfetch, such an uptick in interest from the US shopper would be too enticing to ignore.
The designer marketplace also owns two luxury Browns boutiques in London, allowing it to experiment with a tech-driven in-store experience. However, it does not yet have any permanent physical locations across the Atlantic.
Mintel retail analyst Katie Hansen, who is based in the US, explains: “In the future, Farfetch could look to move into physical retail space within Neiman Marcus. Being in a department store can make luxury brands feel more attainable for consumers.”
Her data showed that 45% of consumers find that department stores offer high-quality items at reasonable prices.
“For Farfetch, being in physical Neiman Marcus locations can give their consumers a way to interact with products, boosting their confidence before making the purchase.”
Embracing ecommerce
The partnership also illustrates how vital it is for luxury brands to invest in technology and recognise ecommerce as a major purchase channel, a trend that accelerated during the pandemic.
In July 2021, Prada reported that online sales grew by 100% compared with a year earlier and ecommerce accounted for 7% of all retail sales.
Kering, which owns Gucci, Balenciaga, Yves Saint Laurent and Alexander McQueen among others, reported that online sales grew by 55% in 2021 compared with the year prior.
Kering also said that the online channel’s penetration rate doubled across the two years of the pandemic, now standing at 15% of total sales.
Farfetch recorded a 35% rise in revenues for the year to December 31, 2021.
Neiman Marcus knew it needed to invest in technology to strengthen its online offering long before it unveiled its partnership with Farfetch.
Last July, the department store group revealed it would invest $500m in tech over the next three years.
Neiman Marcus also knew it was playing catch-up after filing for bankruptcy early in the pandemic. Following a restructuring, it eliminated more than $4bn in debt and $200m of annual interest expense.
Now Farfetch will supply the tech to Neiman Marcus to create international platforms for its subsidiary department store Bergdorf Goodman’s website and app.
Farfetch will also begin stocking products from Neiman Marcus and Bergdorf Goodman on its marketplace.
“Farfetch’s technology will be useful here as Bergdorf Goodman and Neiman Marcus will be able to move their online offers to its superior platform, which provides a better customer experience”
Neil Saunders, GlobalData Retail
Saunders says: “The infusion of cash [from Farfetch] will help Neiman Marcus tackle some of the underlying issues it has been grappling with. This includes using digital channels more effectively and building a stronger online presence.
“Farfetch’s technology will be useful here as Bergdorf Goodman, and potentially Neiman Marcus, will be able to move their online offers to its superior platform, which provides a better customer experience.”
Following the announcement, Farfetch founder and chief executive José Neves said: “Whilst the US is proving to be a long-lasting source of growth for the luxury industry, fuelled by younger generations who are highly engaged with the category, businesses will have to significantly upgrade their digital capabilities – powering both online and offline customer journeys – to meet these new customer expectations and stay ahead in what is going to be a competitive space in the coming years.”
Gen Z demand
Reaching the next generation of luxury shoppers would be an impetus for the tie-up.
According to Bain, the biggest contributors to the global sales recovery of luxury goods were millennials and Gen Z shoppers. This group of younger shoppers is predicted to make up 70% of the market by 2025.
The move to join forces with Farfetch should help connect Neiman Marcus with a younger generation of luxury enthusiasts – a cohort that does not often frequent its traditional department stores.
“The partnership between Farfetch and Neiman Marcus highlights the opportunity for Neiman Marcus to provide their consumers with a more elevated online experience and to reach a younger consumer base,” Mintel’s Hansen explains.
“Only 10% of Gen Z and 9% of millennials have shopped in-store with Neiman Marcus in the last 12 months, and only 5% of Gen Z and 12% of millennials have done so online [according to data collected in August 2021].”
The possibility of capturing this new market through enhanced online performance would also solve a conundrum that many department stores, including Neiman Marcus, have grappled with in recent years.
As Saunders puts it, “this has long been an Achilles heel of the company as its focus on older consumers is not conducive to generating future growth”.
“Being where young luxury shoppers are already will help Neiman Marcus connect with these Gen Z consumer groups”
Katie Hansen, Mintel
However, for younger shoppers, a well-functioning easy-to-use website is the bare minimum that they have come to expect, according to Hansen.
While a seamless experience is necessary to complete a purchase, luxury retailers also need to consider their next steps when wooing younger consumers to keep them coming back.
Personalisation and a focus on experiential retail in-store, as well as the addition of digital tools online, will prove to be necessary investments to attract those shoppers that have not engaged with Neiman Marcus before now.
“[Younger consumers] are increasingly wanting and expecting to use technology such as augmented/virtual reality and virtual try-on options. Younger consumers have grown up with the internet and ecommerce – a well-functioning, easy-to-use website is table stakes for them and retailers who really want to impress them need to bring those tech-based experiences to the table,” concludes Hansen.
The deal between Neiman Marcus and Farfetch looks as if it could usher in a new era of luxury retail, where technological prowess is necessary to survive.
While a strong online experience is necessary to meet growing ecommerce sales, retailers in the category will need to look ahead to predict the expectations of the Gen Z shoppers who are eagerly investing in luxury.
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