Why Is Everyone Betting on Farfetch? - SolidRumor.com

Why Is Everyone Betting on Farfetch?

 Why Is Everyone Betting on Farfetch?

The pandemic has been good to Farfetch.

On Thursday, the online luxury power player reported another record quarter, with the value of goods sold reaching $798 million in the three months ending September 30, a 62 percent increase from the same period a year earlier. Revenue was $438 million, up 71 percent year over year, while gross profit was up 82 percent.

Farfetch shares were up nearly 15 percent in aftermarket trading, another good sign for a stock that’s soared to record highs this year. The company credited a growing user base — 900,000 new customers gained in the second and third quarters of the year — lower customer acquisition costs and less discounting for the tremendous sales growth in its marketplace. It expects to be profitable in the last quarter of 2020 and overall in 2021.

“We believe we are witnessing a paradigm shift in the way people buy luxury,” said Farfetch chief executive José Neves, noting that, in a survey conducted by the company, 45 percent of new customers said that they will continue to do “more” shopping online, while 23 percent said they will do “most” of their shopping online.

It’s quite the reversal of fortune for a business that just over a year ago had investors dizzy with confusion. After its acquisition of brand development platform New Guards Group (NGG), which owns the rights to produce Off-White by Virgil Abloh, among other youth-culture brands, the market wondered where exactly Farfetch, which was still not profitable, was going. Its share price fell to $7.90 in early March, a post-IPO low.

And then Covid-19 hit, throwing Farfetch’s advantage into stark relief. Where its competitors struggled to profit from the unexpected e-commerce boom, overwhelmed by lockdown-related logistics and customer service challenges, Farfetch’s inventory-free marketplace model shined. In the second quarter, the total value of products sold via the site was $721 million, a 48 percent jump year-over-year, generating $365 million in revenue. Over 500,000 new customers bought something on Farfetch during the three-month period, increasing site traffic by 60 percent from a year earlier.

Then, last week, Farfetch announced a joint venture with Chinese tech giant Alibaba and Swiss luxury group Richemont, positioning itself as the bridge between Western brands and Chinese consumers. The $1.15 billion in funding to build a platform that will allow Western brands to sell more inventory in China also included $50 million from Artemis, the family office of the Pinault family, owners of the French luxury group Kering. It was a clear indicator that the luxury industry at large is confident that Farfetch can move the online market ahead, and potentially serve as a technology partner for brands across the board. Richemont Executive Chairman Johann Rupert, who owns Farfetch’s greatest rival, Yoox Net-a-Porter Group (YNAP), characterised the Farfetch China product as “a hybrid platform that will be attractive for all partners.”

Farfetch has never had trouble finding money; it has raised billions of dollars over its 13 years in business from institutional investors, sovereign wealth funds and the public market. But this is the first time in its history where it has emerged as the clear leader in the race to win the customer shopping for luxury online. What changed?

A Better Business Model

Farfetch had its doubters from the beginning. While many investors love a marketplace model, a luxury marketplace seemed, to some, difficult to regulate. But even when that model was proven out, investors remained skeptical of new additions to the strategy, including the move into product development and manufacturing through the $675 million acquisition of NGG in 2019.

However, the pandemic further underscored that vertical integration, from product development to the sales floor, is a major advantage today when control over supply chain and distribution is more crucial than ever. Wholesale, the model on which most of Farfetch’s competitors rely, is increasingly seen as a marketing channel to be used sparingly, rather than the main avenue for selling goods. The marketplace model, or “e-concession,” in which the platform takes a percentage of sales instead of buying the product outright, allows participating brands to manage their own inventory while benefiting from the broad exposure a large platform like Farfetch affords.

Farfetch has also become a preferred white-label partner for independent fashion brands and retailers, from Thom Browne to Harrods, that want to set up their own e-commerce businesses but don’t necessarily want to invest in the technology to make them run smoothly and efficiently. Yoox, part of YNAP, used to be a major technology provider, but over the years partners have defected from the platform. Moncler, for instance, announced that it was moving off the Yoox platform earlier this year, and now works with Farfetch on certain e-commerce elements, including its business in China.

But it’s not just online where Farfetch is developing tech. To make good on its end-to-end approach, it has also launched tools for retailers to use in-store. Chanel, which doesn’t have e-commerce, has partnered with Farfetch to improve its clienteling capabilities. The new venture in China will likely make other fashion brands and groups more reliant on the company as well.

“The deal is a powerful industry nod to the benefit of Farfetch’s platform and luxury community,” Cowen analyst Oliver Chen said in a recent note. “This unites industry leaders that are choosing to invest alongside Farfetch rather than build their own capabilities.”

While Farfetch has long struggled to define its brand with consumers, it says its most recent marketing campaign and site refresh have been well received with consumers and brand partners alike. It is now positioned, intentionally or not, as the upscale everything store — in some ways, the Amazon of luxury, even as Amazon itself makes a real attempt to capture more of that market. For Farfetch, being everything to every luxury consumer makes sense with younger generations whose tastes frequently change, and newness is an imperative. Farfetch’s long-tail assortment gives customers more parts with which to compose their anything-but-static identities.

Maintaining Its Lead

But while Farfetch may be best placed out of its peers to succeed at the moment, there are challenges ahead.

Although the pandemic inspired a slew of new customers to join the platform, it’s still spending a lot of money on acquisition: $46 million in this most recent quarter alone.

Customer acquisition costs were the lowest they’ve been in two years — just 6.9 percent of gross merchandise value — with many new users coming in through the NGG brands that now operate via Farfetch. But in order to keep benefiting from NGG machine, the group will need to keep producing hits. Neves said that NGG’s platform model allows it to easily bring on existing labels and develop original ones for continual newness, noting that the partnership with Farfetch has increased NGG’s online direct-to-consumer sales significantly. Pre-deal, they were 2 percent of NGG’s business; just a year later, the channel makes up 20 percent of revenue.

The group has also not yet proven that its white-label technology is a long-term solution for brands and retailers, who may in the end decide it makes more sense to build that technology in house or use a more universal white-label solution, such as Shopify.

“The manifestation of the new luxury store – the connected experience and how Farfetch can deliver unique physical experiences to brands and boutiques – this remains to be seen,” Chen said.

The latest version of its much-heralded Store of the Future, physical store/clienteling technology that was being developed exclusively with Chanel, will be rolled out to other brands in 2021. Neves said that Chanel has seen good results and, as proof of its success, has begun using the technology at more of its stores.

Finally, Farfetch cannot ignore the threat of Amazon. The e-commerce giant’s Luxury offering has been lacklustre thus far, but the company has plenty of resources at its disposal to solve the platform’s problems. With its global distribution network, Amazon may also end up being a more convenient option for some customers.

“Amazon is a formidable competitor,” Neves said. “It’s all about convenience, it’s all about value, it’s all about, in a way, killing physical retail. That is the complete antithesis of luxury. As a consumer, I love Amazon, I am a Prime subscriber, but it’s not a brand where I would buy something that is driven by emotion.”

Where Farfetch certainly has a strong advantage is in its China venture — a market inaccessible to Amazon — and also in its upper hand with luxury brands and retailers alike, which have sold on the platform for years and generally have its trust. It’s also in a position to lead the industry’s inevitable consolidation: a potential partnership with YNAP, for instance, is now on investors’ minds.

“It would be an incredible coup, if Farfetch and YNAP merged,” said Luca Solca, an analyst at Bernstein, noting that the benefits include lower competition, greater skill, “editorial skills and curation capabilities that Farfetch currently misses” and combined client lists.

As for Neves, he said, “There’s nothing to report,” only noting that Richemont and its stable of brands “was a big get. We want to be the platform for the entire industry.”

Related Articles:

What the Farfetch-Alibaba-Richemont Mega-Deal Means for Luxury E-Commerce

How the Farfetch-Alibaba-Richemont Alliance Could Change the Game in the World’s Largest Luxury Market

Farfetch Sales Soared During Lockdowns

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