Farfetch IPO - Our view

Posted by Thomas Andersson on

After a relatively long period of media speculation, Farfetch has finally filed an intention to list on NYSE (source). At the time of writing this blog there were no specifics on its pricing and the company is no doubt working the funding circuit hard to explore the level of interest and promote the pricing.

While pricing is not known, there are a few other details that we know of. JD.com stepped in as an investor earlier in 2018 and have an option on about a third of the business.

What is Farfetch?

Farfetch is an aggregator platform for luxury fashion pulling together inventory from 600+ independent boutiques globally. It has also started working directly with brands and count some 370+ direct brand partnerships. The platform make up the bulk of revenue at >90%.

In addition to the platform Farfetch has also developed a number of software initiatives and acquired a few businesses including a high street store (Browns Fashion) in London. These are:

  • Farfetch Black & White: Online website design & management for brands
  • Farfetch OS: This is meant to be an operating system for the future of high street retailing or the "Store of the Future".
  • Browns Fashion; A British institution for cool and hip luxury wear for a long time. Trading for Browns had stalled at the time of the acquisition. The retailer is now used to explore Store of the Future technologies.

Key success factors?

The company pull together independent boutiques from all over the world in a neat format for luxury fashion consumers to buy easily. Signing up new boutiques was its primary target a few years ago, but the company have realised they need to work directly with brands in order to maintain growth (there is a limited amount of suitable independent fashion boutiques across the world). Styleintelligence sources indicate some independents make as much as 60% of revenue from the Farfetch channel.

Farfetch disclosed it work with 375 brands directly across the globe. While this is impressive, it also point to a certain downgrading of the quality of luxury brands. Our sources indicate some brands which are more "luxury aspirational" in nature are being onboarded in order to drive growth. Farfetch demand brands hold a certain minimum inventory level dedicated to them - this is a requirement driven by past experiences selling goods out of stock.

The luxury market

BAIN & Company has created an excellent market analysis of the global luxury market.

Statistics

  • c. 2900 employees (39% technology staff)
  • website and customers services in 12 languages (10 excluding Chinese versions)
  • $700m funding (to Series G, 2018)
  • GMV of $910m in 2017, up from $586m in 2016
  • Platform revenue: $296m in 2017, up from $181m in 2016
  • Partners: 614 boutiques + 375 brands
  • 98% of partner boutiques in exclusive one-year contracts
  • Average order value: $620 in 2017, up from $584 in 2016
  • Number of orders: 1,881,000 in 2017, up from 1,260,000 in 2016
  • Offices: Braga, Dubai, Hong Kong, Lisbon, London, Los Angeles, Moscow, New Delhi, New York, Porto, São Paulo, Shanghai and Tokyo
  • Production centers: Guimarães, Los Angeles, São Paulo and Hong Kong (these are used for producing uniform product imagery)

Styleintelligence view

Farfetch has been successful in raising >$700m for its activites. However, it has not been profitable in any of its operational life and as a commission-based business model the company has struggled to increase its fees by working with boutiques with a limited margin call. Working directly with brands will improve prospects for increasing commission fees, but the quality of brands it will have to work with may diminish its brand as a "luxury destination".

Being a global company means it has had to develop 12 language versions. However, Farfetch is unique among its peers in maintaining such a high number of languages for its website as well as customer services functions. This adds significant costs when introducing a new product with a description that needs to be translated into 12 languages and checked for mistakes. In this sense, Farfetch is more akin to a brand owner promoting its own products to a global audience - in fact, the only other companies using this many languages are brands directly.

The company has attempted to become a technology supplier of choice for its partners by putting money into (what we perceive as "pet projects") its Black & White and FarfetchOS divisions. It has also acquired a number of companies to widen its revenue sources. This has inflated employee numbers to circa 2,900, at which point the company now appears inefficient. About half of all staff are based in Portugal and about a third of all staff are technical. For a company making $386m revenue in 2017 this appears very high.

Larger luxury brand owners such as Richemont, LVMH, Kering, etc. are growing  more confident and savvy when it comes to ecommerce and have grown their share of online over the past decade while pureplayers have lost ground (in terms of % share).

The partnerships Farfetch has managed to develop are significant from the point of view that they give Farfetch access to wider ranges, but are primarily a result of these partner's stagnating growth. The health of these partners may improve temporarily as a result of Farfetch injecting a bit of ecommerce, but the longer term is probably already determined.

Styleintelligence

Our commentary is based on our continued coverage of Farfetch and general industry knowledge.

Further suggested reading:


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