IPO

Farfetch IPO Shows Luxury Retailers Ready To Ware Online

“Fashion is the armor to survive the reality of everyday life,” said fashion photographer Bill Cunningham. No one wears just one suit of armor, and no one shops in just one place when it comes to the mixing and matching of that armor, the hunting for designer names and comparing price tags against the waxing [...]

“Fashion is the armor to survive the reality of everyday life,” said fashion photographer Bill Cunningham. No one wears just one suit of armor, and no one shops in just one place when it comes to the mixing and matching of that armor, the hunting for designer names and comparing price tags against the waxing and waning of one’s bank account.

The online marketplace has disrupted any number of verticals, changing the way we shop and spend, and where we grab must-have items — from books to rugs to lamps, and sometimes from across international borders. Why should luxury fashion be any different?

This week, luxury online marketplace Farfetch filed to list its shares on the New York Stock Exchange (NYSE) at a valuation, rumored by outlets such as CNBC, to be as much as $6 billion. Much can be gleaned from what is known as the S-1 in this case the F-1 form (as Farfetch is a foreign company, based in the U.K.), the prospectus that companies must file to list their shares with the U.S. Securities and Exchange Commission (SEC).

In that filing, the company makes a bit of a bold statement that seems to take Farfetch beyond the confines of closets and hangers, and toward eCommerce at large. As the company claims in the F-1: “Farfetch is the leading technology platform for the global luxury fashion industry. We operate the only truly global luxury digital marketplace at scale, seamlessly connecting brands, retailers and consumers. We are redefining how fashion is bought and sold through technology, data and innovation.”

Later in the filing, the company stated, “We are a technology company at our core.”

Those three tranches — the aforementioned technology, data and innovation — are being deployed by Farfetch on a global stage that has a number of zeros attached to it. The company noted that its own industry, market and competitive positioning data comes from Bain & Company and a number of other third-party data sources. In citing some stats, the company said that the global market for luxury goods stood at $307 billion last year and should reach as much as $446 billion by 2025, per Bain.

Within that, how much is online? Citing Bain again, a fair chunk at 9 percent of the market, to rise to 25 percent by 2025. If the 6 percent compound annual growth rate (CAGR) of the global market since 2010 for luxury goods is a decent clip, the online CAGR is a gallop at about 27 percent for the same period.

Changing How We Browse And Buy — Beyond Blouses?

Going by the Bain data, the shift is a palpable one, it seems, as customers go from parquet and carpeted aisles to virtual ones. We’ve been down this, well, aisle before, perhaps most recently in the electronics and grocery realms.

The model is a bit different here, as Farfetch functions as a marketplace, bringing buyers and sellers together in this case, different stores and labels that carry their own inventories (note the claim of “minimal inventory risk” as stated). The reach is considerable, touching 335,000 stock keeping units (SKUs) across 3,200 brands. Within that latter number, stated Farfetch, at the end of the most recent quarter, “we partnered with 614 of the world’s leading luxury retailers and 375 brands.”

For the retailer itself, the luxury house that sits amid well-trod tourist paths in, say, Paris or Rome, the chance is one to broaden reach. To bring the “it” jacket to those who are not on-site, but who have the cash to spend — now, the gratification can be global and instant. The playing field is level, where the boutique may not have the scale of Dior, for instance, but can now be supplied to buyers with speed.

The online marketplace brings those two sides of the commerce equation from far-flung locales, time zones and currencies. This comes against the traditional backdrop of luxury houses/brands, having built networks of stores owned directly or through department stores, as Farfetched noted, limited by distribution, supply and local markets. The smaller brands (and many of them are family-owned) have taken their wares to independent fashion locations and boutiques.

Thus, fragmentation reigns in luxury at large (that is globally). However, through the centralized marketplace, with data science and machine learning “to guide merchandising, targeting, curation and feedback,” the company touts its technology that helps fine-tune targeting and feedback across menswear, womenswear, vintage and other categories.

The headcount and brainpower behind the targeting and feedback is significant, with a data scientist and engineering headcount of 631. That staffing, and continued investment in the mechanics of the platform, may be what has helped push tech expenses to triple to $32 million, with a loss of $112 million in 2017 and $81 million in 2016. The top line, which consists of commissions, was $386 million last year, up 60 percent from the previous year.

The growth for the company itself has been significant, showing the traction and attraction of the online model. Total value of goods sold through the site was up 55 percent in 2017, over 2016, to $910 million. That value grew a bit faster than the customer base.

Oh, and as for the shipping: The company logs a revenue line item known as “platform fulfillment revenues,” which is tied to shipping and customs clearing services that the company provides to consumers, net of free shipping and promotional codes. That was $74 million in 2017. Total costs of revenues, which include shipping costs, went from $125 million in 2016 to $181.2 million last year.

Farfetch said in the filing that its active users, who have made a purchase in the past 12 months, jumped 44 percent year over year to 935,800. That is as measured at the end of 2017 over 2016’s numbers. The average order value was $622. That’s a far cry more than the average online order of clothing, that, as estimated by Statista, mostly ranged from $50 to $100 in the United States alone, across men and women.

The Faces Behind The Numbers — And Where They Are

The headline numbers may be impressive, but who is buying? Perhaps no surprise: the young’ns.

The millennials and those part of Gen Z take center stage here, with a collective tally of birth years spanning from 1980 t0 1994 for the former, 1995 to 2009 for the latter. The two groups, noted Farfetch, should have as much as 45 percent of the luxury market, at least as measured in terms of spend. They will displace the current queens and kings of the luxury spend, now dominated by Gen X.

The who and how much  yes, but where? Farfetch’s filing stated that “the demand for luxury fashion is truly global.” Though dominated by Europe and the Americas (this, from Bain again) with almost two thirds of the market, at present, look for emerging markets in China (growing from 30 percent of the market as measured in 2016 to 35 percent in 2025) to grab a bigger chunk of the pie.

Even A Bit Of Brick-And-Mortar

Even amid the investments in augmented reality (AR), such as with the Farfetch Store of the Future, all is not dead in brick-and-mortar, where the company is in partnership with Chanel. That partnership will seek to leverage insight into both online and offline channels. As noted by The Business of Fashion, Chanel is not selling its items online on the Farfetch marketplace, and still relies on the in-store experience. Farfetch’s AR program, said the site, has tech that recognizes a customer as they check into the store and can populate a wish list with items — and, perhaps not surprisingly, offer a mobile payments experience.

The company also noted that, three years ago, it bought Browns retail stores  which has two locations in London and where, according to the filing, the company looks to understand the “fashion ecosystem through the lens of a boutique.” So, yes, just like another online giant, Farfetch has its reach into the tangible realm.

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Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. Check out our April 2019 Unattended Retail Report. 

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