How YOOX turned the luxury-goods industry onto digital
by Greg Williams, September 24, 2014
Photograph by Olaf Blecker.
On May 17, 2000, accountants from KPMG were called to the Carnaby Street offices of the online fashion retailer boo.com.
Their task was to begin liquidating the assets of a company that had burned through £80m in cash from investors including Goldman Sachs, JP Morgan and Bernard Arnault, the then chairman of luxury group LVMH. Boo.com became the most conspicuous British failure of web 1.0.
Two months earlier, a 30-year-old Italian entrepreneur, Federico Marchetti, had launched a company called Yoox.com -- the name was derived from the Y and X chromosomes and the 00 a nod towards the binary of computer code. Like the founders of Boo.com, Marchetti's vision was of a web-based company that sold clothes and accessories but, unlike the London-based startup, Marchetti thought of his platform as being less about lifestyle and more about, well, selling stuff.
The first line of his business plan was that Yoox would be "the global internet retailing partner for leading fashion and design brands". Marchetti's straightforward statement of intent has, to a large degree, come about. Now, as well as Yoox.com, which sells end-of-season and remainder clothing for brands such as Dolce & Gabbana, Yves Saint Laurent, Armani, Stella McCartney, Prada, Lanvin and Diesel, the Yoox Group owns thecorner.com, which showcases designers through mini-stores, a footwear retail platform, shoescribe.com, and "powers" -- meaning all web services and order fulfilment -- the online operations of 37 of the world's best-known luxury brands as an "invisible partner".
Marchetti is referred to as the Jeff Bezos of fashion, in that he has mastered the logistical aspect of the business: the management of online stores, the handling and shipping of products, digital production, payments and customer care. These parts of the fashion industry don't receive the attention of catwalk shows or play into the popular notion of the agonised genius in the atelier, but nevertheless are crucial to the way that luxury brands are perceived.
To achieve this Marchetti has done something that, in the year 2000, appeared unlikely: he has succeeded in persuading executives in the luxury goods industry, many of whom were initially skeptical toward online retail, that e-commerce can complement their traditional activities by providing them with a global sales platform and new ways of marketing their products through responsive, elegant websites.
Marchetti describes how, as a teenager, he would look at things and wonder how they might be improved. "That's what I applied to fashion and the internet 15 years ago," he says. "I looked at these two worlds that were so distant from each other, but I saw that they could help each other one day with the help of a link. I was, I am, the link."
"Since I was a child I wanted to be an entrepreneur," Marchetti explains in June 2014, sitting at a white, circular table in the vast space that serves as his office at the Yoox Group's headquarters in the Navigli area of Milan. The space feels more like a luxurious warehouse than the domain of an executive of a listed company with a market capitalisation of €1.16 billion (£930m).
Marchetti, who is neat and trim, grew up in Ravenna, a small city on the Adriatic about 70km east of Bologna. The son of a warehouse man at Fiat and a telephonist, Marchetti didn't grow up in the kind of family that sends its children to do an MBA in the US. But after an undergraduate degree in economics and commerce from Luigi Bocconi University in Milan, he was awarded a scholarship to Columbia University. And, although Marchetti had no interest in climbing the corporate ladder, he took a job as an analyst at Goldman Sachs, initially in London and then in Milan. "I wanted to work for banks for three years with the simple goal: to learn as much as possible," he says. "I was not passionate about corporate finance; I got there, I worked 90 hours per week for three years and I learned a lot, then I left."
Marchetti put together a business plan in October and November of 1999 and quit his job in December, having been at the Boston-based consulting firm Bain & Co. for only three months. (He describes the experience of working there as "horrible".)
Marchetti spent January pitching his startup idea: potential investors were receptive, but nobody wanted to be the first to write a cheque. Then, in mid-February 2000, Marchetti met Elserino Piol, the former CEO and Chairman of Olivetti. "He understood technology, understood people, understood how to make a company," Marchetti says. Piol invested three billion lira (£1.2m) in exchange for 33 per cent of the business, and still sits on the Yoox board. The deal was done in March 2000. A month later tech stocks across the world began to tank. Marchetti says that he was unfazed. "I'm pretty orthodox in following a plan," he says. "So I have a vision, and there is a plan from here to the vision... So basically I don't care what happens."
Nevertheless, he points out that there was a degree of good fortune in his timing. "If everything had happened two months later, we wouldn't be here, that's for sure," he says, "because the doors of the venture capitalists, they closed for three years -- after April, no money for anybody."
Marchetti had a vision, he had capital, but there was still a major obstacle to overcome: persuading luxury goods and fashion companies that they could trust him with their brands. Trusting a complete outsider, a man from the provinces with limited connections in Milan or the fashion industry, who was attempting to convince them to believe in a medium still in its infancy, was a big step. Through friends and friends of friends he met with companies such as Armani and influential individuals like the entrepreneur Renzo Rosso, the founder of Diesel. Many were skeptical, but a few bought into Marchetti's vision and took the plunge. "I have to say,chapeau[hats off] to all these designers, because they believed in me and I was not giving them millions at that time -- now, yes. I was just really selling a dream and they dreamed with me." "I think that it's fair to say that fashion and luxury goods companies opposed the internet for many years," says Luca Solca, managing director of Exane BNP Paribas Luxury Goods. "There were concerns about the discount part of it, there were concerns about brand trivialisation."
Fundamentally though, the brands needed expertise and execution.
The Yoox.com business model is straightforward -- the company purchases out-of-season inventory and sells it on to customers via the web. The mono-brand model -- meaning the designer websites that the Yoox Group "powers" -- is different: Yoox makes a little less than a third of the sale price on every item, meaning that the brands make more than wholesale and a little less than at retail, but without the associated costs. "The idea of a digital store was fascinating to me because of the enormous potential -- the internet allowed us to reach a global clientele and especially people in countries where we don't have a mono-brand shop," says Carolina Castiglioni, special projects director of Marni which, in 2006, became the first luxury goods company to launch a mono-brand store with the Yoox Group. "[It was] a way also to present our collection in our way and not through distributors or multi-brand shops. You can create image, constantly update and present it in your way."
Up until that point, luxury brands had experimented by putting some accessories online, but few were willing to risk their mainline collections on the web. Marni took the plunge, creating a site that didn't make a distinction between physical and virtual retail. "The idea was to have the concept the same as the shops," Castiglioni says. "Ready-to-wear was the main category. At that time it was a bit strange. But, in the end, we were right."
Yoox innovated by introducing a data driven approach to fashion, relying on an algorithm that's said to run to four hundred pages of code. Marchetti describes its author, Alberto Grignolo, as "the most important man in the organisation". Among other things, the code helps buyers to ensure that Yoox purchases exactly the right amount of inventory -- a key attribute in a low margin business -- to satisfy customer demand and, critically, how customers will respond to trends in what remains a business built on intangibles such as trends and emotion.
Davide Di Dario stands in the doorway to a Yoox warehouse on an industrial estate just outside Bologna. The company's demand planning director is tall and dressed all in black -- jeans, a T-shirt and jacket. Di Dario, 43, who is lean from swimming five days per week, trained as a philologist at the University of Pisa, but turned from a life in academia to one in customer service after ending up working in a call centre after college.
Along with a team of 15 managers who work at a nearby hushed, white-washed office with vaulted ceilings known within the company as "the temple", Di Dario oversees 250 web developers, designers and programmers (the company employs 800 people in total). By creating a seamless, rich customer experience through content and marrying this with customer data, Yoox is able to create what it hopes is something akin to a luxury experience in the real world. "We have a huge amount of data they don't have in the physical world," Di Dario says. His team is able to establish dozens of data points, including how long a customer has been shopping, what they looked at, what time of day they looked, and the time it took to make a purchase. "You cannot be further than us from the customer," Di Dario says, "but we are very close to them because we know exactly what they are doing." Products are built from customer response -- for instance, the team established there was a demand for packaging without the Yoox logo. "Feedback isn't just about solving the customer problem," Di Dario says. "It's an internal tool to optimise."
A seamless, handsome web offering is one thing: delivering products to customers when those buyers could be anywhere from Beijing to Bradford is a very different challenge, especially when an order is received, on average, every 11 seconds. The moment a customer completes a transaction, the order is conveyed to the Yoox Group warehouse. The company currently has three such facilities outside Bologna, with four more to be built. There are also hubs in New Jersey, Tokyo, Hong Kong and Shanghai. "The business model is based on centralised inventory, so the majority of the products that we present to our users worldwide are here," Di Dario says. "This is coupled with local hubs -- they are shipment hubs as well as [being] equipped with local digital production. On one hand it gives us the possibility to sell to our nearly 15 million customers a centralised inventory, increasing the margin, on the other side we have the possibility to localise the inventory -- for instance, for certain brands who want to be closer to certain key markets."
When Yoox first built the warehouses in 2007 they operated in a traditional way, using barcodes and manual picking. But the company grew at such a rate that the physical capacity of the warehouse couldn't keep up with the digital demand. "In 2010, we had to decide whether to move to a larger place or to operate in a different manner," Di Dario says. "So we automated the warehouses based on RFID (Radio Frequency Identification)." Up to that point, RFID tags had been widely used in the grocery industry, but not in fashion.
An inbound logistics warehouse performs product receipt and product SKU (a unique product identifier code) to which an RFID tag is attached. "It's the core of the automation," Di Dario says. "RFID gives us full control of the inventory level -- we know where every single item is throughout the supply chain and the automation is based on it."
What Di Dario means is that, at every stage, the operation is dependent on being able to locate each of the five million products it holds in its warehouses instantly and match them with a customer order. This takes place in warehouse spaces totalling 86km<sup>2</sup>, the equivalent of 318 tennis courts.
When deliveries are made to the warehouse, one item is taken from each batch and the other items are put into stock. The product that's been separated from the others is then used for digital production, attaching all the data needed for the item to be presented and sold online -- the product description, photography, post-production and quality control. The warehouses have 60 photographers working in 55 studios on mono-brands and automated photography for Yoox.com that completes 200 photos an hour, by means of a series of mannequins that glide slowly around a mechanised route. This way 15,000 items are photographed every day.
The products are then distributed randomly in what Yoox employees describe as "aliens": black crates that are stacked in the warehouses ready for robotic cranes to fetch them when an order comes in. The accuracy of the contents of the box is checked throughout the warehousing process -- the crates pass along conveyor belts both at ground level and suspended overhead, and, at various stages, must pass through white arches. Inside each are antennae that verify the contents of the crate via the RFID tags. "We are always 100 per cent sure that what's contained in the box is what the customer orders," Di Dario says. The facility normally operates from 8am to 6pm but during busy periods, such as Christmas, it can be open 24 hours per day.
The crates are stored in enormous shelving units until an order picker needs one of the items they contain. This part of the warehouse looks like a dystopian city as storyboarded by James Cameron: there are 20 aisles, each of which is 12.5 metres tall, extending from the floor to ceiling. An automated ordering system dictates the movement of two stacker cranes that are balletic and jerky by turns as they glide between the long aisles at six metres per second, collecting crates at a mesmerising pace.
The cranes deliver their cargo to conveyor belts, which run for 4.9km throughout the warehouse. "The same as the Autodromo Dino Ferrari at Imola," Di Dario says. There are two different kinds of orders -- one is for the final customer, the other for local hubs.
When crates arrive at one of the 24 picking stations, an image of the required item appears onscreen in front the picker. The worker finds the item in the crate -- which include items in assorted colours to make them easier to pick out -- and confirms that it's correct by swiping the RFID tag. Next to each picker are what appear to be stacks of lockers. After an item has been swiped, a blue light associated with a particular locker lights up and the item is placed inside. On the other side of the lockers a packer will remove the completed order, box it up with tissue paper, stickers or ribbons and print a unique tag on the box that identifies its contents. "We increased the productivity here by 500 per cent," Di Dario says of the automated process as packages pass by with labels reading Russia, France, the UK and Greece. In 2013, the company shipped 2.8 million orders. It's late afternoon in Bologna as Di Dario nods towards a pile of boxes. "Those will be in New York tomorrow morning," he says.
At a table at the far end of the warehouse four women are packing goods for a mono-brand -- in this case high-end leather-goods firm Bottega Veneta. Each luxury company has strict rules on the packaging and presentation of its goods, meaning that only five items are processed per hour. "These are the least productive tables because we are required to perform these activities," Di Dario says. "It's the same as in a boutique; the only difference is you are not offered coffee or prosecco."
The former CEO of Burberry, Angela Ahrendts -- who assumed the role of vice president of retail at Apple in May 2014 -- portrayed the luxury customer as having two defining characteristics: they used mobile devices to shop and they travelled widely. Most luxury stores now offer a facility where customers can try a coat on in, say, Hong Kong and then pick it up in-store when you're on business in Zurich, or have it delivered to your home in Lisbon.
Executives at Yoox are keen to stress that the company's global expansion is underpinned by a bespoke approach to customer service in each territory: transactions are completed in local currencies, sizing is organised in local denominations, partnerships are signed with native payment companies (such as Sofort in Germany and Alipay in China) and mother-tongue customer agents answer calls at its seven customer service centres. Accordingly, courier companies are hired in different territories; in China, for instance, such is the concern about replica goods that, when FedEx couriers deliver a package, they wait for 15 minutes to give the customer time to inspect and try on the garment.
Mobile now accounts for 40 per cent of Yoox's traffic. Marchetti expects that to be 50 per cent by the end of the year, but he is less bullish about so-called "omnichannel" retail -- meaning a seamless continuity of experience throughout all customer touchpoints in the physical and digital world. "Any innovation depends on how long it's going to take -- so mobile takes six or seven years to really become 50 per cent of the traffic. As an information tool, cross-channel is already relevant. In terms of retail I think it's going to take a little bit longer than everybody expects."
Equally, Marchetti doesn't see catwalk shows becoming an outdated way of designers marketing and selling their products. "Because the fashion show is a good way to get people together in one place and make business, which is something with the internet you cannot do."
Marchetti describes himself as like il grillo parlante, the talking cricket in Carlo Collodi's book from 1883, Le Avventure di Pinocchio: he communicates between two worlds -- technology and fashion. "If they don't want to follow, they don't want to follow, but all the time I say what I think," he says of the executives at the luxury companies, the vast majority of whom would have nothing to do with Amazon. Although Marchetti doesn't mention Amazon directly he says that "everything starts from the source -- the source is still what we're working on and what differentiates you from all the others." The implication being that, although brands are willing to innovate in retail, they aren't likely to end up on Amazon.
This position of trust within the luxury industry has made him a wealthy man -- he has an 11 per cent fully diluted stake in Yoox. (Public offerings are a relatively rare event in Italy -- Yoox's IPO on December 3, 2009, was the first in the country in 17 months.) Marchetti recently renovated an apartment in Milan's Piazza Castello, opposite the city's 15th century castle, after making a personal appeal, via a handwritten letter, to the elderly owners who planned just to rent the space: they ended up selling it to Marchetti. He collects art -- he has work by Lucian Freud, John Currin and Andy Warhol, among others -- and a four-year-old daughter, Margherita, with his girlfriend, fashion journalist Kerry Olsen. Yoox now sells work by artists such as Damian Hirst, Mark Quinn and Peter Blake and designs from companies such as Cappellini, Alessi and Kartell (Yoox has recently taken on Kartell as one of its mono-brand clients.) And the Yoox Group is now moving into creative services, offering strategic and creative direction for its partner brands -- with 13 million visitors per month, there is an opportunity to develop relevant content. Yet, although Marchetti's housewarming was attended by big names in Milanese fashion, he still retains a slight distance from the industry -- choosing, for instance, to travel economy class when flying in Europe. "I think that there are a lot of advantages of being an outsider, because I can see everything from very fresh eyes, and I still have fresh eyes, despite the fact that I'm kind of an e-commerce dinosaur -- I mean, 15 years in e-commerce is quite a lot," he says. "Once you are an insider, sometimes you lose your spontaneity, and so I love to be a little bit one step back. But on the other side, two steps forward in terms of innovation. So I find my balance in the middle."
Luca Solca, the industry analyst who was CEO of luxury group IT Holding (which held licenses to Karl Lagerfeld, Jean Paul Gaultier and Ferré) from 2002 to 2005 and partnered with Yoox, believes that there will continue to be significant demand within the fashion industry for end-of-season clearance services, and predicts that this is where Yoox's growth will occur. But he sees two major challenges for Marchetti. "Large brands in the future will want to manage the online distribution in the same way that they'd manage their stores -- directly." Solca sees other challenges coming from mass-market e-commerce sites in the US and Asia. "Amazon seems to be quite interested in luxury goods in the US," he says. "And (Chinese e-commerce sites) Tmall and Taobao [are] offering similar services in China. So I think they're going to be up against the big boys."
Back in Milan, one of the many screens at the Yoox office displaying real-time customer data shows that, somewhere in Italy, a customer has just placed an order for €145.08. Marchetti takes a sip of his coffee. "It's a lot of responsibility," he says. "But I continue to sleep very well."
Originally published as the cover story of Wired UK.