On November the 6th, Richemont, a recognized leader in luxury goods, and Alibaba, a major player in online retail, announced that they were investing in Farfetch, a London-based 13-year-old luxury digital platform listed on the Nasdaq. Alibaba and Richemont will cooperate with Farfetch in China.

In the same announcement, Artemis, the holding company of Kering Group, disclosed an increasing stake in Farfetch. This appears to be a very interesting encounter between the so-called old economy and the digital platform business model.

In the 10-year-old debate on value and growth, we think that what is happening now with Covid-19 is somewhat misunderstood. Many analysts explain the dichotomy between value and growth stocks with macro factors: old economy stocks are underperforming because their profits are falling and technology stocks are rising because their sales, future profits and outlook are thriving.

This explains the direction, but not the magnitude. Most old-economy valuations have collapsed whilst the technology valuations are through the roof. Old economy trades on single-digit PEs.

Good old PEs are not available for most red-hot tech stocks for lack of E. They trade, instead on double-digit EV/Sales. Not only are digital platforms disrupting the real economy, but they are reshuffling the valuation spectrum.

The Fartfetch deal can bring new light on this reshuffle. If Farfetch can build online luxury shops and experiences at zero marginal cost, do we still need hundreds of luxury retail outfits in the real world? and what is the real value of luxury “brick and mortar” shops?

The same question is sending shockwaves in the US Retail REIT markets - do we still need bank branches at every corner with Applecard or PayPal? Three decades ago, each brand had a single store in their hometown and some corners in big department stores around the world. Part of the appeal of these premium department stores was in hosting corner spaces for premium brands such as Hermes and Ferragamo.

Then premium brands scaled up to become megabrands by covering the map with their own stores in premium locations in big cities. They went from local to global. Going online, alone or on platforms, they can from now on achieve the same goal at a very low marginal cost: being everywhere on Farfetch, Alibaba or Amazon.

JD.com, China's second-largest retail platform, launched a white-glove delivery service where the “luxury experience” is inverted: instead of happening in the store, it happens when the luxury product is delivered, at home or in the office, by an elegant delivery man dressed in a suit and wearing white gloves.

This option previously available only for luxury goods will soon be available for a wider variety of items including sports, bags and gifts. This service has proved hugely popular and many customers are ready to pay extra for it.

According to a survey Farfetch did with their newer customers (900,000 in the last 6 months), 45% said they will continue to do more of their shopping online now that they are used to it. Interestingly, 23% said they would do most of their shopping online.

In other words, they will not buy in real stores, which raises the question of the value of a lot of luxury real estate. Mind the gap.

Established luxury groups such as Richemont and Kering are hedging their bets by investing in Farfetch at these levels: the present value of future rents from digital shops is covering the potential shortfall from real ones. Rents are shifting from brick-and-mortar assets to digital concessions. The communiqué uses a wording that is typical of the digital brave new world: “The goal of the deal is to bring luxury retail to the next generation by seamlessly merging the digital and physical realms”. This is actually “the mission”, not the goal.

The goal is to directly supply Richemont, Alibaba and Farfetch with digital gold: user data such as tastes, purchasing patterns, payment details and so on, are “seamlessly” collected from high-spending digital cohorts stored on the cloud from where they will drive algorithms that would help to replicate and extend the “luxury retail for the next generation”.

This deal is a significant inflection point. Keeping in mind their well-known rivalry with Kering, the question is what will be LVMH next move.Will LVMH double down on their current mostly in-store luxury experience or will they go to a digital Canossa?

In that context, there is an interesting pawn to be plaid at the edge of the chessboard: Baozun (BZN.NQ) a small listed Chinese brand digital platform. It offers some similarities with Farfetch. JD.com group and its backer Tencent are the two other elephants in the room.