Why luxury retailers have finally given in to digital

Richemont and Yoox Group announced details of their deal Tuesday, which will create one of the leading online luxury fashion retailers with combined 2014 sales of 1.3 billion euros ($1.4 billion), trumping interest from online giant Amazon.

The group behind Cartier and Van Cleef & Arpels jewelry brands, Richemont, said the combined entity will launch a capital increase of up to 200 million euros upon completion of the deal. Richemont will hold a 50 percent stake in the new company, which will be called Yoox Net-A-Porter Group.

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The deal comes amid increased interest and competition in the online luxury space, with the likes of e-commerce retailer Farfetch earning a whopping $1 billion valuation at the start of the month.

Natalie Massenet, the former fashion journalist who founded Net-a-Porter (NAP) in 2000, said the new combined group is now the world's biggest luxury fashion store that "never closes and is without geographical borders."

Luxury goods companies have been hesitant to embrace new digital trends, according to Mario Ortelli, senior luxury analyst at Bernstein. However, as the industry faces a slowdown due to lackluster growth in emerging markets, companies must "evolve or face possible irrelevance," he told CNBC.

"Richemont is primarily a hard luxury goods retailer, but it recognized the growth potential of the NAP business. Keeping a stake was very important to them, as they are still learning a lot about online retailing," Ortelli said.

Forecast growth in the traditional luxury goods market is 5 percent for the next five years, compared to historic growth of 6 percent over the past 17 years, according to Bernstein data.

At the same time, some 62 percent of luxury sales were impacted by digital, while pure in-store sales are decreasing, the data showed.

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London-based group Farfetch, which sells clothing for high-end, independent fashion boutiques, has raised new investment valuing it at $1 billion.

The company, which lets users shop on their desktops and smartphones for clothing and accessories at more than 300 boutique stores in 25 countries around the world, drummed up $86 million in its latest round of funding from investors, including Russian venture capitalist Yuri Milner.

"Online fashion and luxury is becoming more and more relevant especially at a time when luxury goods companies are realizing increasing the number of stores is not really an option anymore," Luca Solca, an analyst at Exane BNP Paribas, told CNBC.

"China has been penetrated and the frontier there is populated, so they are looking for more opportunities to grow. Giving consumers convenience to buy online as well as in-store in an integrated and seamless manner has been received very well. This area has seen growth in the region of 30 percent in the last few years and we expect it to sustain," he added.

Along with Richemont, Ortelli named LVMH and Burberry as companies that have recognized the importance of embracing online and digital marketing in order to drive more sales.

"Change doesn't come without discomfort. But the positive side of it is that the luxury brands have already conquered the more difficult part of creating truly great companies. They have already done the hard part in carefully developing timeless, long-standing and durable brands, and technology is just another way to leverage their valuable assets ... and we remind you that it costs exactly US$0.00 to add a friend on Facebook," Ortelli said in a research note.

Too much hype on Net-a-Porter?

Speaking on Richemont's sale of NAP, Thomas Chauvet, a luxury analyst at Citigroup, said the business was "largely irrelevant" to the Swiss company's investment case, and shareholders should not be "overly excited" by the deal.

"We remain buyers (of Richemont) on the hard luxury segment's long-term growth prospects—NAP accounts for only around 4 percent of our sum-of-parts valuation, hence we do not think Richemont shareholders should be overly excited by the Yoox/NAP merger," he said.

"However, we retain our buy rating and 98 Swiss francs ($100) target price on Richemont, one of the most attractive emerging market growth stories, in our view," he added.