What’s Next for Farfetch After a Blockbuster IPO?
The fashion platform had a wildly enthusiastic reception on Wall Street. Here’s how the company plans to maintain the momentum.
Farfetch’s public listing had a wildly enthusiastic reception on Wall Street, with shares pricing at $20 — above the expected range — raising $885 million for the company at a $6.2 billion valuation, before soaring once they began trading on the New York Stock Exchange Friday, ending at $28.45. The marketplace — which connects consumers with a curated network of fashion boutiques and brands — has officially emerged from a crowded field to challenge Yoox Net-a-Porter as the leading online purveyor of luxury apparel and accessories. At its closing share price Friday, indicating a valuation north of $8 billion, it's certainly left YNAP in the dust.
Investors buying into the IPO are betting that Farfetch founder and chief executive José Neves and his team can replicate the last few years of blistering growth and eventually find a path to profitability.
In an interview on Friday, Neves said the online luxury market would grow by $100 billion over the next seven years and that his company plans to take a significant slice of those sales.
“Growth is going to be explosive... and we are helping brands and retailers in this industry really seize that opportunity,” he said. Neves added that emerging markets would be key to replicating the 55 percent growth in gross merchandise value the company saw last year.
Technology is the other pillar of the company’s strategy, including a robust mobile app (over half of Farfetch’s sales are already made through mobile phones), and software designed to improve both the online and in-store shopping experiences. All that requires a lot of investment, which is why Neves can’t say when the company will be profitable. Losses widened in the first half of 2018 to $68 million, more than double the same period last year.
“The focus should be on those investments and not in short-term profitability,” he said.
Investors seem unconcerned, perhaps considering precedents like Amazon.com, which ran losses for years before a combination of scale and smart decisions to invest in emerging markets like cloud computing swung the company into the black. Farfetch is trying to walk the same path; it’s achieving Amazon-like ubiquity in some markets, particularly outside the world’s primary fashion capitals, where local luxury retail options are few and far between.
What does Farfetch need to do to make good on its promise to investors?
1. Build an unassailable, global lead over rivals.
Farfetch strikes a bargain with each of the retailers and brands that sell through its marketplace: hand over roughly 30 percent of each sale in exchange for access to millions of potential customers around the world. It’s a deal plenty of sellers are happy to strike, particularly local boutiques and emerging designers who might otherwise struggle to put their wares in front of customers in Angola or Bahrain, to name two of the 190 countries where Farfetch ships.
This “asset light” model is one reason Farfetch was able to secure such a high valuation; its sellers take on the expense and risk of maintaining stores and warehouses full of luxury goods. But it’s also a vulnerability. Retailers work with multiple platform players, from ShopStyle to LVMH-backed Lyst. For Farfetch to justify its relatively-high take rate, it must offer something its rivals can’t. That challenge is likely one reason Farfetch is hyper-focused on underserved emerging markets for growth. By partnering with regional powerhouses like Chalhoub Group in the Middle East and JD.com in China, Farfetch can deliver on its promise to bring sellers the world.
“We have been investing ahead of the curve in our international presence,” as well as new categories like jewellery and childrenswear,” Neves said. “We’re only scratching the surface in these markets and in these categories.”
2. Attract millennials with a powerful customer experience
Farfetch’s vast and growing product selection is among its chief selling points. It also runs counter to one of the biggest trends in retail: the curated shopping experience. But curation is trickier to pull off with a marketplace, where sellers control what’s for sale and have every incentive to offer the broadest selection possible to attract customers. This can turn off consumers, particularly younger ones, who grow frustrated at having to sift through thousands of options to find the perfect item.
Farfetch tries to address this by turning its enormous selection to its advantage. Offering hard-to-find or unique items can appeal to young consumers, who “place more emphasis on buying fashion that reflects their own personality, embracing individuality and self-expression,” the company said in a regulatory filing before the IPO.
Much of Farfetch’s technology investment is centered on taming its own marketplace. Personal shoppers, shopping via text and targeted marketing are among the methods used to create what the company hopes will be an appealing shopping experience. In an interview, Farfetch co-chairman (and Net-a-Porter founder) Natalie Massenet said that, in the future, the website and apps will be even more tailored to individuals, offering products curated by influencers, trends and geographies.
That doesn’t mean Farfetch will start telling customers — or its sellers — exactly what to buy.
“This is the fashion industry — being too predictive removes half of the fun of discovering something you didn’t know you wanted in the first place,” she said.
3. Maintain a technological edge
Farfetch’s early innovations — global shipping, offering a clean, standardized shopping experience — were revelations to small sellers and even some large luxury brands. Today, when even small stores can build robust online presence out of the box with services like Shopify, Farfetch’s core offerings are just table stakes.
The company tripled its investment in technology this year, hiring hundreds of engineers to develop new products and services. Neves said, among other projects, these teams are focusing on mobile as well as the “Store of the Future” project to “transform physical retail” (starting with a Chanel partnership). In July, Farfetch acquired a startup, CuriosityChina, which helps brands find customers and make sales on mobile. Over half of global sales are already made through Farfetch’s app or mobile site, and 70 percent of sales in China are through the app alone.
“We’re only seeing the beginning of what the potential of mobile can bring to the fashion industry,” Massenet said.
These offerings must go beyond today’s gold standard and make a compelling case to sellers that they’ll gain an edge over competitors by signing on with Farfetch.
4. Watch out for Amazon
Farfetch’s valuation in part reflects a perception that the company is Amazon-proof. Luxury is one of the few corners of retail where the e-commerce giant hasn’t made inroads.
Grocers no doubt told themselves the same thing as they watched Amazon’s flailing attempts to enter their market - until the company bought Whole Foods in 2017. Amazon has a long history of entering surprising categories, and no one should consider themselves off limits. Alibaba, with its fast-growing Luxury Pavilion on Tmall, has shown it’s not so outlandish for the same company to sell both plumbing supplies and designer handbags.