When I asked Federico Marchetti, the founder and CEO of Yoox Group, to take part in this series, he suggested we first meet for lunch at an Italian restaurant near his company’s U.S. offices in Soho. It was a convivial gesture and, it struck me, a typical one for this Milan-based entrepreneur who combines European sophistication with American drive and openness. That combination of qualities has made Yoox one of the biggest success stories in digital retail. In addition to running their own multibrand e-commerce sites—Yoox.com, TheCorner.com, and Shoescribe.com—Marchetti’s team operates the online stores for designers ranging from Armani to Alexander Wang, as well as several brands under the Kering umbrella. Once we had finished our espressos, we headed up to Yoox’s white-walled, open-plan space and got down to business.
You’ve said there would never be a Yoox bricks-and-mortar store. Why is that?
Yoox.com is still so revolutionary in my mind—it’s fashion, design, and art melded together, vintage with younger designers, as well as end-of-season clothes. The only way I can imagine it is kind of like a space shuttle landing in the Piazza Duomo in Milano—that would be a good Yoox.com store.
But do you think in general there’s a place for physical stores? If you can buy everything online, why do you still need the physical bricks-and-mortar store?
I’m in my mid-40s, so I’m not someone that was born buying from a smartphone. Personally, I am a hybrid model. I go to check out the new stores, I buy things for my daughter in the store as well as online, so I’m kind of a 50-50 consumer between both stores and online. The question is, for the young kids, if it makes sense to have a store in 30 years. I think so. I think it will always stay there. I’ve never believed in any form of fanaticism because I’ve gone through all of this fanaticism with my Yoox story. When I founded Yoox, it was in 2000—it was 1999 when I invented it and 2000 when I launched it. And before the launch, because of e-commerce and the Internet, everybody was saying that stores would disappear. It was ’99. Then, suddenly, the bubble burst and everybody was saying that e-commerce was going to disappear! [ laughs] So I think that, as usual, it’s important to find a balance between the two.
You have two sides to your business: You have your own multibrand e-commerce sites, but you also operate “monobrand” sites for everyone from Armani to the Kering group. How do you work with the monobrands?
This is constant work, and I think the frequency of the work will increase because the websites, the online flagship stores of the brands, they will age faster and faster and faster because of the pace of technology and social and connectivity and smartphones. The speed is accelerating so immensely that it forces everybody to rethink and re-change everything every one or two years. I mean, a brand is a brand, so I’m not saying that they should change everything because they cannot be schizophrenic. I’m just talking about fine-tuning to adjust with the pace of technology, so not necessarily the image—probably the image will stay the same for 10 years—but the functionality and the features. The risk of having something that is old is very high, and in technology you cannot have something very old. That’s the reason why we set up a creative agency internally. It was not part of the original plan, frankly, but we operate not as an outsourcer but as a partner. Basically we get a percentage of sales as a commercial partnership—or in the case of Kering, it’s a joint venture, but that’s more or less the same—so basically if it works and everything goes well, we make money. If it doesn’t work, we don’t make any money, which is very different from an outsourcing model where they charge the cost with the markup. For us, the sales on the online store during the contract of five to 10 years are very important, and the website is a very important component, so we decided two years ago to set up our own agency that is trying to find the balance between form and function—not a compromise, a balance.
“The level of sophistication of our logistics I think is pretty impressive. You definitely wouldn’t expect that from an Italian company.”
What percentage of your business is the monobrand side?
Do you think it’ll remain about that?
Yeah. I never planned to have the opposite. I see the two components as very different, but they leverage each other…We invent something and we try it first on Yoox.com. If it works, we also can roll it out to a, b, c, d, e, and f.
Do you think of Net-a-Porter as your biggest competitor?
Yes. And in the last 15 years, I have to say, frankly, that it’s good. It’s good because it’s kind of a duel. There’s a movie, I think, an old movie—not the one by Steven Spielberg [ Duel, 1971], but the one with Harvey Keitel [ The Duellists, 1977].
By Ridley Scott.
Yes, Ridley Scott. And I see it a little bit like that, which is probably the usual thing between, I don’t know, Pepsi Cola and Coca-Cola. I don’t know who’s Coke and who’s Pepsi between Net-a-Porter and Yoox.
It keeps you on your toes.
If the competition is good and ethical and made out of quality, I think the competition is good. The problem is when the competition is unfair. But in the case of Net-a-Porter, definitely it’s been a good competition.
They recently launched a magazine [ Porter, in February 2014]. Is that something you would ever consider doing?
No. In the last 14 years, we have taken very different directions. We’re competing, but we have taken very different directions. For example, we have the monobrand component, which is a very good strategy in my mind—to forge strategic relationships with the brands in the long-term rather than just buying and selling season after season as a retailer as we do on the multibrand sites. And they haven’t taken that approach. They’ve done the magazine and we’re not doing a magazine. We went to China with a full-price model, they went to China with an off-price model. So it’s been super-interesting to see this duel in the last 14 years. And more to come, probably.
As the monobrands become more sophisticated and are able to do these things themselves, do you worry that they’ll take their e-commerce operations in-house?
I know it is counterintuitive, but I think exactly the opposite. In the sense that if a brand wants to do e-commerce in an amateur way—which means not building a big, sustainable business—I think it’s better if they do it on their own. If a brand wants to build a sustainable business, profitable in the long-term, with not too many mistakes and too many investments, I think that’s when Yoox probably gets into the picture, and basically the Kering situation is what happens. They already had their e-commerce. And now, on the 30th of July, we announced also that AlexanderWang.com U.S. is coming to Yoox. Before, we were operating the site in Europe and Asia, and in the U.S. it was operated by others. So I see more and more brands that have done it by themselves or through other agencies coming to Yoox after they’ve said, “OK, I give up.”
You can offer them your experience in building websites, but you also have some pretty sophisticated systems in your factory in Italy, right? What are the most important elements there?
I think still a competitive advantage of Yoox is this global distribution that is superefficient—100 countries with a great service level to the customer operated through an automated warehouse where innovation has been key. For example, we don’t have a bar code anymore. We have only a microchip, RFID, which is radio frequency identification. Every item has a radio frequency, so we don’t lose anything anymore. I think the percentage of mistakes is 0.01 percent. Given the complexity of so many stores, so many countries, we had to make sure that everything was perfect in terms of execution, so that’s how technology and innovation get into the picture…The level of sophistication of our logistics I think is pretty impressive. You definitely wouldn’t expect that from an Italian company. [ laughs] It’s more like a kind of German-meets-Japanese.
How big a part of your thinking is mobile now? Do you know the percentage of people who are ordering on mobile versus desktop?
Yeah, we know everything. [ laughs] Sometimes too much. There’s so much information that we get lost ourselves. Everybody’s talking about “big data.” But the real problem in this big data is how to find the right information. And on mobile, we were quite good in identifying that this was the next revolution. Especially in the last couple of years we’ve seen a dramatic shift to smartphones in terms of traffic. Almost 50 percent of the traffic of the group is coming from smartphones, which is quite an important percentage, and I don’t think it’s going to stop. We’re talking about around 13 million unique monthly visitors in total—13, 14 million. So it means that 7 million are coming from smartphones, which is incredible. A real change has happened in the last couple of years. But we’ve worked on this mobile integration technology since 2006, so let’s say that this time we were very prepared. Very prepared. And the difficulty of my job is to see what is the right innovation, where to put a lot of money, a lot of investments, a lot of work. Because, I mean, it’s easy to get drunk, no? So far I’ve been a little bit lucky.
Obviously you have a lot of data, but at the end of the day, does intuition still play a big part?
I shouldn’t say this, being not only the founder but also the CEO of a public company, but intuition is still an important part. The way I try to think is pretty simple in the end. Unlike the corporate world with these big strategies, I think sometimes the best way to do it is just to put yourself in your customer’s shoes. Just think like a normal customer. What would the customer want? Sometimes at the corporate level, people get distracted, but in a way it’s very easy…I can remember when I was 18, I had a cell phone and it was pretty big…And I remember thinking, Oh, my God, with this phone, why can’t you incorporate a camera?…And a few years later they incorporated the camera in the phone. Obviously I’m not an engineer. It was not my job and my dream to do it, but I think in the end it’s pretty simple. Just put yourself in the customer’s shoes and you will make sure that everything goes well.
“I try not to make our website too automated, and sometimes I have to say that a little mistake makes it very human. It’s the Japanese concept of wabi-sabi—the beauty of imperfection.”
What do you think is next? Do you think it’s some form of wearable technology, whether it’s Google Glass or the Apple Watch or…?
Huh. Personally, I’m not a big fan of Google Glass. I know that I shouldn’t say it, but it’s a little bit alienating in a way. I think that again if you put yourself in the customers’ shoes, they don’t want to be too much into a Big Brother world, into this world of alienation…I’m not a technology guy in a way. I’m someone that is using technology, but for me the human component is super-important…For example, on Yoox.com, on our website, I try not to make it too automated, and sometimes actually I have to say that a little mistake makes it very human, which is the Japanese concept of wabi-sabi—basically the beauty of imperfection. If everything is perfect and you suggest this and that, I think people get scared, while I think it’s important to make them feel at ease. I want our customers to feel that on the other side of the screen there are people, not only machines, and that’s why we hire people who more or less are in the same age group as our customers, the same percentage of women and men. Our customers are 60:40, our employees are 60:40, women and men. Our customers are in their 30s, our employees are in their 30s. I really believe in that. It’s more like a sociological, humanistic point of view—it’s not an entrepreneur’s point of view.
What are some of the challenges of customer service online? What are the big issues you face there?
It is a big challenge and also quite costly, but I think it’s super-important. Yoox based its reputation on service 14 or 15 years ago. We need to continue to evolve because service is changing and evolving and that requires a greater level of sophistication. We came up with a few, let’s say, “nice” ideas, like the butler service in China, which is basically not to give the customer the trouble of bagging an item that she doesn’t want. The courier waits outside the door for 10 minutes so you can try it on, and if you don’t like it, you just give it back. No calling, waiting, all that. This is one example. For Shoescribe, we came up with great new services, like, for example, the Polaroid. Women who love shoes have tons of shoes in their wardrobe, and sometimes they don’t know how to identify them. And in the past, they used to take a picture, a Polaroid, and stick it on the box. So with Shoescribe, whenever you buy something, you get the Polaroid automatically. I mean, these are little things, but sometimes it’s the detail that makes a difference. I really think that the next challenge for many retailers will be not necessarily on free shipping but will be on how to come up with new services that are giving customers something that they really love.
Is your partnership with WeChat an important part of that?
I think it could be…It could fit into this picture as one of the “little things.” We try, we experiment, and we see also if the customer loves it, because sometimes we come up with ideas but the reception is not great. Innovation without mistakes doesn’t exist. If you want to be an innovator, you need to make mistakes.
Talking about the customer, America is your number one market. In the future, do you think that China might be bigger than America?
No, I never thought about it and never announced it. Even when we launched in China, we never announced that China was big, for a simple reason. The Internet, e-commerce, have been invented in this country [America], and time is very important. So far we see that most of the full-price on Yoox is coming from America still, while the Chinese love bargains simply because they’ve not been exposed to full price for a long time. Yes, it’s true that they’re fast and changing, but in America you have had e-commerce, full price, for 20 years. We were the first to bring luxury to China at full price with our opening of Armani.com in 2010, so it’s only four years old. It’s normal that it will take a while. So if you ask me, in 30 years, will China be bigger than America? I don’t know how to answer. But probably not.
In terms of the profile of the customer, have you seen a change there? Is it now the superrich, the so-called one percent, who are driving a huge part of the business versus everyone else?
I haven’t seen a change. There’s a low percentage that buys a lot. It’s always been like that—not only for online; it’s always been like that for department stores, for shops, so it’s part of the industry. I haven’t seen any change in the last 15 years.
How does data help you to innovate?
For the buying season, the assortment is made first by data, then by fashion instinct. Yoox.com is regulated and ruled by an algorithm that basically says what to buy for the next season. Then the fashion buyers can adjust that, but first it’s coming from an algorithm. It’s an analysis of the last 14 years. It’s a proprietary thing, like Google’s algorithm, to maximize the retail sales and to appeal to more and more customers. We give a lot of freedom to the buyers, but at least there’s a shopping list of what the algorithm says. Again, it’s technology and human. You have help from the technology because it will say, “Ten of these would be perfect, five of these or 500 of these, 100, 1,000 of these.” So that’s the ideal world. And then if you’re a fashion buyer, you do what you want but you have guidance.
But is it a predictive model? Is it saying, “We sold this many last season, so we’ll sell this many more next season…”?
Uh-huh. It’s super-interesting. It’s been developed by our general manager [Alberto Grignolo] and his team. He’s the general manager of Yoox who has worked with me for 14 years…He got promoted to the most important person in the organization. He’s coming from econometrics—he’s not a fashion person. He was a guy who was teaching econometrics at a university, and he came up with this algorithm that has become more and more sophisticated season after season. And now we have a big team in terms of retail analytics that is working on this. It’s super-interesting, this part. It complements me because I’m more instinctive, customer-driven, sometimes more creative-driven. He’s more like the analytical man, so it’s good.
Presumably, a traditional retailer doesn’t have that kind of algorithm?
OK, I learned something new today.
It’s quite impressive.
Is there a danger of a certain pleasure of discovery being lost online, the experience of going to a store and finding something unexpected?
No. It’s not a question of losing this sense of discovery online, because that’s exactly what we’re trying to do. I went to Sicily last summer for my holidays and I found these beautiful ceramic plates in Palermo called the Ceramiche De Simone. It’s amazing that you cannot find them anywhere. And I bought them for our house together with my partner, and as a retailer, I said, “OK, maybe for Christmas they’re perfect on Yoox.” And basically we’re selling a lot of their ceramics.
“The dream is to build a business that will stay forever, no? When I’m old with my family, retired someplace, my dream is to open ‘The Wall Street Journal’ or the ‘Financial Times’ and to read about Yoox in the headlines.”
So that’s the Federico algorithm.
[ laughs] As I said, it’s important to mix the two components. So important. The algorithm cannot predict this. The unpredictable needs to come from an instinct.
Amazon recently announced they had second-quarter revenues of $19.3 billion and still made a loss of $126 million. What does that say about the e-commerce space and how hard it is online in terms of margins?
E-commerce is a very tight-margin business because of the level of complexity. You need to be global. You need to make investments—heavy investments—in technology because of the speed of technology. You need to know your customer in different situations in different markets. You need a level of talent that requires to be paid as talents, because you are very lucky just to find them, and then if you find them, it’s better if you pay them a lot. So, it’s highly competitive. It is a very difficult industry. It’s not an El Dorado. Everybody thinks it’s an El Dorado, but it’s not. Most of my competitors that I know, they are losing money or breaking even or getting there. Yoox, it’s an American dream and an Italian story in a way because it’s been structured as an American company but we’re based in Italy. As an Italian story, I always looked at the profitability and not just at the top line. It’s typical of Italy, given that the capital markets are less sophisticated than in America. You have less access to money, and if you have less access to money, you have to be more parsimonious. So Yoox has been profitable since the fourth quarter of 2004. But our level of profitability is definitely tiny. I mean, we are successful because we are profitable, but we’re striving to be more profitable. Definitely the volumes, the growth, and the predicted leverage will make us more profitable in the future. But it’s always been my goal to be profitable. For me, a company needs to be profitable, if it is e-commerce, if it is anything, otherwise it’s not a proper company in a way. Not a profitable company—it’s not a business built to last. And the dream is to build a business that will stay forever, no? When I’m old with my family, retired someplace, my dream is to open The Wall Street Journal or the Financial Times and to read about Yoox in the headlines—in 30 years from now, not to disappear. And then profitability kicks in. I like to compare e-commerce with airlines. There are very, very few that are profitable and they require a level of discipline, a level of managing the business as a business with tight margins, which means trying to make as few mistakes as possible, especially big mistakes. It’s not such a fancy business.
Maybe in 30 years you’ll read about that space shuttle store. You said you’d never do a magazine, but on the websites, especially on TheCorner.com, you have quite a lot of content as well as e-commerce. Why is it important to have that?
We’re not a shoppable magazine and will never be a shoppable magazine. We’ll never open our own physical shop. But we’re a shop with interesting content. Otherwise, the shop is boring. Part of me, I’m a shopkeeper. And part of me, I’m an entertainer. You need to entertain your customer, otherwise they will never shop. It’s as simple as that.