FARFETCHED

When we think of luxury goods, many of us picture an opulent retail environment; where customer service is key and is defined in terms of the extent of personal attention provided by swooning sales associates. The design of the retail environment would also reinforce this perception: expensive carpeting or marble flooring, expensive accessories in the store. All reflecting the exclusiveness and lifestyle that people (who can afford it) look for in the luxury space.

Many people argue that you cannot sell luxury online. They justify this by arguing that it is difficult if not impossible to replicate this “luxury” effect on an online website. More importantly shoppers, in their quest to purchase luxury items actively seek the “experiential” aspects. This, in their view can only be achieved in the physical space.

I happen to disagree.

Ongoing developments in technology mean that e-tailer’s websites are constantly undergoing re-invention. Rather than relying on text and simple videos, they are moving more rapidly to address the experiential dimension. The use of simulation, virtual and augmented reality are featuring more prominently.

Farfetch is a company that is worthy of further study and analysis.

Founded in 2007 by Jose Neves and has positioned its business very firmly in the luxury end of fashion. It is present in 190 countries and sells luxury merchandise from over 1,000 brands. In essence it connects global shoppers to over 500 boutiques from its UK-based platform.

In 2016 it generated over $800 million in overall business. This translates into over $200 million in terms of sales. This emanates from an average of 20% to 25% commission that is earns from individual items that it sells on behalf of its clients (the branders).

In 2017 and 2018 it has also made significant acquisitions such as JD.com – China’s second largest ecommerce company and a partnership with Chalhoub – a luxury goods distributor in the Middle-East.

The business model employed by Farfetch is interesting. The CEO, Jose Neves, describes the company as a “tech” business: not as a retailer. This is graphically emphasised by the fact that 1,200 of its 2,000 employees are engineers.

This is also reflected in the high level of investment that it has made in areas such as IT, logistics and delivery processing.

It is “asset light”: at no time carrying any inventory. Instead it builds many different websites for its customers. This is evidenced in a recent strategic partnership that it has entered into with Harrods: the quintessential UK luxury Department Store. Under the terms of this agreement, Harrods joins a group of seventeen luxury brands including: DKNY, Manola, Emilio Pucci, Blahnik and JW Anderson

For such retailers, Farfetch addresses one of their key limitations. They do not have the knowledge or expertise internally to manage the complexities of an online channel platform. These complexities are centred on the following areas: ecommerce management, operations support, international logistics support and overall technical support. Brands such as Harrods will continue to manage trading issues such as marketing, brand relationships and product strategy on the site, along with creative and editorial content.

Arguably this is a “marriage made in heaven”. Farfetch brings it considerable technical expertise to the party and the brander brings the power and equity of its brand. End result? An effective online platform which can optimise performance in terms of global sales for the brander and considerable revenue from commissions payments to Farfetch.

Farfetch, through one of its subsidiaries, offers white-label ecommerce services for brands and retailers. White label production is often used for mass-produced generic products including electronics, consumer products and software packages such as DVD players, televisions, and web applications. Some companies maintain a sub-brand for their goods, for example the same model of DVD player may be sold by Dixons as a Saisho and by Currys as a Matsui, which are brands exclusively used by those companies.

Some websites use white labels to enable a successful brand to offer a service without having to invest in creating the technology and infrastructure itself. Many IT and modern marketing companies outsource or use white-label companies and services to provide specialist services without having to invest in developing their own product.

Farfetch acquired Browns; multi-brand womenswear boutique in 2017. This allows it to gain a direct experience and knowledge of operating a “bricks and mortar” store and to feed in this knowledge to its concept of “store of the future” – a data-powered operating system for retailers. Neves describes this development as “augmented retail”. This essentially represents a mixture of online and offline experiences for the shopper.

The “store of the future” is a good example of omni channels in operation. The operating system captures consumer information. This is made available to sales associates who can “tap into” this resource and work more proactively with shoppers. The shopper can connect with Farfetch either online or offline.

In some ways this overall business model is similar to Yoos Net-a-Porter (YNAP) a multi-brand online platform which was recently acquired by Richement. YNAP however is a pure ecommerce retailer that controls the entire value chain: from customer relationships, product inventory and fulfilment to the digital presentation of the brand.

By contrast Farfetch operates as a market-place through partnerships with independent retailers, who post their offerings on its platform. The branders manage aspects such as fulfilment. They use the data generated from the Farfetch platform for implementation purposes. This reinforces the approach by Farfetch: that it is a technology company and not an actual retailer. It does not hold or manage inventory.

In case you think that Farfetch has dismissed the concept of the traditional bricks and mortar retail store, the CEO argues strongly that the future of retailing in the luxury end of the market will be centred precisely in that area. He argues that Farfetch exists to help brands and retailers more fully understand the luxury shopping experience. By providing a platform it can achieve this objective. Harvey Nichols has also signed up with Farfetch to work in this strategy.

What can we learn from our review of Farfetch?

Firstly this business model is not new or unique. Arguably Amazon performs most of the features offered by Farfetch and it has been the pioneer of such electronic marketplaces.

Farfetch has however captured a prominent global position in the field of luxury fashion mainly through its relentless investment in the “techy” side of the value chain.

As noted earlier while many luxury branders exhibit dexterity and creativity in terms of marketing their creations, they are noticeably lacking in the skill-sets required to set up and operate a robust value chain e-commerce platform site. By entering into strategic partnerships with companies such as Farfetch (as evidenced by recent developments with Harrods and Harvey Nichols) luxury branders can widen their appeal to a global market without having to make the required investment to do so.

We are likely to see many similar developments going forward over the next few years.

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