Farfetch is an online luxury fashion retailer, a company that pioneered a tech-driven model that doesn’t rely on owning inventory. They platformized the supply chain and created a new business model around high margins and fast turnover, shifting the retail fashion model in the process. Let’s dig a little deeper to see how they did it.
How does Farfetch make money?
Farfetch builds relationships with high-end fashion boutiques and brands, integrates them into their eCommerce back-end, and then sells their product to customers on Farfetch.com. Unlike other platforms that look similar – like Yoox – Farfetch does not bear any inventory cost. Their original business was built around an innovative, technology-driven retail model where they make 25% commission on the sale of the goods, plus another 8% if they fulfill the order.
The two customer profiles on the supply side are boutiques and brands. Boutiques do not have a website (or at least not a fully-functioning eCommerce site) and the brands opt to outsource their operations to Farfetch. Combined, it gives Farfetch a dynamic inventory of luxury fashion, both men’s and women’s, from around the world. CEO Jose Neves’s vision was built around the idea of ‘distributed stock‘ where a particular item could be ordered, shipped and delivered to a customer in another country or continent.
As Farfetch has grown in size, they have expanded their footprint, both online and into physical retail stores in select cities. Average order size has stayed ~$650 consistently over the last 5 years, meaning that they generate ~$150 USD in Platform Revenues per average fulfilled order, and then additional revenues on the back-end of the supply chain to deliver these orders.
Community-Centric or Commercial-Partner Strategy?
Beyond its business model, one thing that makes Farfetch unique compared to other tech startups is the fact that it’s a European-based brand that didn’t take any VC money from Silicon Valley. Part of the European story is the way that the company formed out of a community between Euro-based fashion brands and partners in London and Porto.
This is one very interesting example where the foundations of the company are rooted in the community, yet the business model required partnerships to grow to scale. That’s because Farfetch’s main value proposition was the hybrid between fashion and technology, right-brain and left-brain, creatives and engineers. Given the need to take an order from a customer in New York, fulfil the order in Hong Kong, and then ship it to the customer in New York – multiplied by millions of orders – it was essential that Farfetch has strong partners in both the fashion and technology worlds.
Capital came from a mix of investors – European VCs, Strategic Investors and eCommerce companies. Talent was poached from fashion brands and media houses in the early years to help shape the brand. When the company crossed the Unicorn Mark of $1 billion valuation in 2015, they had a development team of more than 200, something no other fashion brand was doing. Nowadays, it has partnerships with major fashion brands such as Chanel, social-good platforms like Kiva (Positively Farfetch), and innovative pilot programs like Second Life where they aggregate second-hand goods for luxury retailers and offer users a credit to spend on Farfetch.
Overall, we see a hybrid between a community-centric strategy within the fashion world and a commercial-partner strategy to help achieve scale. The competitive advantage linked to this strategy is that they have exclusivity with 98% of retailers on their platform.
Fundraising and Valuation
Farfetch went public last year, in Q3 of 2018, raising $885 million at a valuation of $6.2 billion – priced relative to its $385 million revenues in FY 2017. Despite surging 53% on its first day of trading, the company currently trades at a market cap of ~$2.5 billion due to investor concerns over its business model.
As we have seen is the trend in 2019 with Unicorns going public, concerns mount among Wall Street and large Financial Institutions around these companies abilities to generate significant and sustainable, long-term profits. In Q2 of 2019, the company lost $90 million. Furthermore, they spent $675 million on the New Guards Group acquisition in order to ‘future proof the business model’ by having an exclusive platform to launch new brands.
Prior to going public, between 2010 and 2017, the company raised approximately $700 million. Given the company’s successful IPO, those private investors would have all made money; however, the new group of public investors is underwater. The key challenges surrounding Farfetch’s business model in the current environment are three-fold: rising customer acquisition costs (CAC), lack of clarity on the revenue model given the new acquisitions, and deepening quarterly losses.
Farfetch Business Model Canvas
A business model is defined as:
Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.
Future fashion retailer. Combines a zero-inventory eCommerce model with distributed bricks-and-mortar warehousing and sales
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