Cettire on Fire: When Fast Fashion Meets Financial Fiasco

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Cettire was an Australian success story. It began in 2018 and grew to almost a half billion dollars in revenue in FY23, before crashing badly the following year. Part of the crash was due to the company itself - customers never like to feel like they’ve been duped. But there’s more to the company’s performance this year, and this week we’re going to analyse it and predict how it’s going to perform in future.

Cettire’s Rapid Growth

Cettire was a home-grown Australian success story. Founded by Australian businessman Dean Mintz in 2017, listed on the ASX in 2020, the company is an online third-party reseller of luxury goods. This turned out to be perfect timing as spending on consumer goods increased during Covid - the company went from $500k revenue in FY18 to $416m in FY23!

The company was founded and grew at a perfect time. the market for luxury goods had exploded over the previous decade, particularly in Asia with it’s massively growing middle class, which had money to spend. Many luxury brands are extremely protective about their supply chain and sales channels, because they want to be seen and experienced as exclusive. This is why you’ll never find a DIOR Saddle Tote Bag (retail $5k) at your local TK Maxx. These brands are veeerrrrryyy careful about where they sell at a discount - and this online luxury discount reseller sales channel is growing - it’s expected to grow five times faster than full-price channels between now and 2023.

Cettire spends a lot of time and money negotiating for the best assortment of products at the right price. Competition is keen - its largest competitor Farfetch almost went under in recent years.

The business model isn’t new though: dropshipping direct from overseas factories and warehouses to consumers worldwide means skinny margins but is also enormously scalable with a negative cash conversion cycle - customers pay up front before paying the suppliers. It quickly became a money-printing machine, with Gross Margins of between 20%-25%, and EBITDA margin fluctuating between 12% and 7% (aside from a blip in FY22 with negative EBITDA margin due to investment needed to scale its operating platform).

Along the way Mintz managed to cash out, selling more than $330m worth of shares over the past 2 years. He still retains 30% ownership of the company.

FY24 Drama

Earlier this year Cettire made the news, for all the wrong reasons.

It had been caught engaging in a particularly creative form of customs duty arbitrage in its customer pricing. Here’s a quick explanation of what it had been doing:

Let’s say you order a selection of goods via the Cettire website. The total sales value of these goods is over AUD 1,000, which is the customs duty & import taxes threshold in Australia - you must pay customs duties on the value of those goods.t’s say you order a selection of goods via the Cettire website. The total sales value of these goods is over AUD 1,000, which is the customs duty & import taxes threshold in Australia - you must pay customs duties on the value of those goods.

But if your order is split into multiple shipments, and the value of each shipment is less than AUD 1,000, zero customs duties & taxes are payable, and Cettire keeps the amount you had paid for them.

In order to exploit this arbitrage Cettire has to make a calculation: Is the value of customs duties & taxes more than the cost of splitting the shipment? If the answer is yes, the company could pocket the difference. If not, that order can be sent as a single shipment. (remember that really large platform investment in FY22? New systems are great for optimising order processing)

Creative? Yes. Unfair to customers? also yes. Legal? Since buying from them means accepting T&C’s that nobody ever reads … ¯\(ツ)/¯

It’s worth mentioning that customs duties & taxes minimum thresholds are pretty contentious because of the need to balance “revenue leakage” for governments with the additional effort & cost of policing thresholds. This is also one of the many reasons why Shein and Temu are so cost effective with their individual shipments compared with buying from a store that has had to pay the full amount of customs duties and taxes.

Since the AFR’s expose of the arbitrage, Cettire announced in March 2024 it had reconfigured its pricing engine so the contentious duties & taxes would “no longer be itemised”, so while you won’t see them on your $848.55 Balenciaga t-shirt order, if it’s shipped separately from your $346.47 Baseball cap, rest assured no duties or taxes would be paid on either.

The damage was done, however. Profitability fell off a cliff in the second half of 2024, culminating in a Profit warning in June 2024: Q4 breakeven only with full year profit around $32m to $35m. Share price dropped 75% since reaching a peak of $4.90 in March.

Analysis

The big question is, can Cettire recover? It has performed extremely well until this year, so are the last two quarters just another blip?

Competition

Third party luxury goods resellers like Cettire compete on two fronts: primarily with each other where price and availability determines sales, and secondly with the luxury brands themselves, who try to balance exclusivity of their brand’s product range with increased profits from selling some of their assortment via resellers.

Because of this, Cettire has no inherent brand power of its own. Customers search online for bargain-priced products of their favourite brands. If Cettire can’t provide this at the right price, they’ll very quickly go to a competitor. The threat of substitution is very high, meaning a large part of the company’s poor Q3 & Q4 EBITDA is most likely because they’re had to eat their duties & taxes costs themselves … and that is unlikely to improve.

Customers

The world’s top fashion brands are feeling the pinch as cost of living pressure resulted in reduced sales globally. The impact is being felt particularly in markets with a large middle class that has been buying big over the previous five years but are now purchasing less. China for example has seen luxury goods discounted in the primary sales channel as much as 50% in 2024.

This means there is now enormous pressure on the reseller sales channel to cut sales prices, which is going to directly impact margins.

Suppliers

The grey market that Cettire and its competitors operate in is worth $250 billion annually. When times are good suppliers aren’t too bothered by the competition as they reap the benefit of increased sales and a larger client base. But when primary sales of luxury goods are dropping worldwide, brands can begin restricting supply of goods to sales channels they deem as harming their own sales. For example, sneaker label Golden Goose is one that claims Cettire is not an authorised reseller of its products.

This all puts Cettire in a weak negotiating position when it comes to suppliers because it is:

• a price taker

• dependent on its luxury brand suppliers deciding which products should be sold via the reseller channel

Given the current pressure its suppliers are under in their primary sales channels, this is a major threat (even ahead of angry customers feeling duped about their duties & taxes).

Future

The customs duties & taxes issue is now old news for Cettire. It’s now battling against:

• suppliers who are trying to secure their primary sales channels, which will affect purchase prices and more importantly the products available to it;

• customers who have less money to spend and are consequently looking for lower sales prices, pushing margins down;

• Competition from competitors dealing with the same problems - although Cettire was doing better than most, so they may benefit when some of these competitors close down.

It really looks like Cettire’s financial performance is unlikely to improve over the next couple of years. Mintz was lucky (or prescient) to cash out when he did.

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👋 Hi, I'm the founder of Ascern Advisers. We provide CFO Services for businesses with Growth Potential. DM me or email me at david@ascern.com.au if you want to chat.