Luxury, CAC & The Next Farfetch

Farfetch’s recent ‘near’ collapse will undoubtedly be felt on the luxury side of the eCommerce market.

The question is, was it about Farfetch’s mistakes or a bigger signal about the luxury market overall? Let’s dive in.

Synonymous with sophistication and glamour, luxury brands thrived on offline experiences in flagship locations. Today, with the luxury customer base and shopping behaviour having transformed — online sales are projected to claim 30% of the luxury goods market by 2025.

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Luxury, CAC & The Next Farfetch

Luxury eCommerce Faced Rising CACs

While Luxury brands have had their share of struggles over the last few years, it has paled in comparison to what happened to Luxury eCommerce platforms, especially Farfetch.

Of those pictured below, Dutch-based competitor MyTheresa didn’t fare much better (although it survived), while The RealReal is a luxury reCommerce platform (secondhand), another proxy of the state of the market.


One simple data point to illustrate the ‘state of play’ – and something that really plagued Farfetch’s core business model – was the rising CAC (Customer Acquisition Costs), as evidence by the graph below.

The exponential increase in CAC is a typical sign in a market that becomes saturated by competition. Shakeouts, consolidation, and a repositioning naturally occur, as the increase in CAC cuts into thinning margins.

Only the fittest can survive.

In this case, the top-tier luxury brands will naturally survive (as they always, historically, do) but what will happen to the second-tier luxury brands and corresponding luxury eCommerce platforms in the future?

Inflation, Margin Pressure, and ‘The Consumer’

Luxury’s biggest groups, such as Richemont, LVMH and Hermès, are expected to widen their lead on weaker competitors … Analysts expect the performance gap between the market’s elite brands and those favoured by aspirational buyers, who helped drive a multiyear luxury boom but are now retreating under pressure from inflation, to further widen as the industry’s growth slows over the coming year.


Margins are under pressure heading into 2024 compared to the last couple of years. Although, as we can see on the graph below, they remain fairly healthy by historical standards.


While margins for listed luxury companies averaged about 20 per cent in 2022 and 2023, “for 2024, we estimate there will be about 30 basis points of margin pressure,”


The increased margin pressure can in some ways be compensated by raising prices – many luxury goods have doubled in price or more in the last decade, as exclusivity sells; however, there is a certain ‘rotation’ to what segments remain hot each year as trends/preferences change.

Thus larger, deep-pocketed luxury houses can effectively take a portfolio approach and outperform more niche brands amid tightening conditions. In 2023, all major luxury houses posted revenue gains, but some were small single-digit % gains, while others were able to grow their top-line by 25%.

An additional source of pressure on the business model comes from the ‘weakening consumer.’ America and Europe’s luxury market share still rank the highest, but China’s global ranking has grown in the last several years from 11% in 2019 to 17% in 2022.

By 2022, the Americas’ share grew to 32% and China’s to 17%, while Europe dropped to 27%, according to the Bain-Altagamma 2022 Luxury Goods Worldwide Market Study.


While the top-tier of the wealth spectrum will continue to splurge on haute couture and related accessories, deteriorating economic outlooks in China and the West for the higher end of ‘middle-income earners’ will continue to put downward pressure on the business model.

The decline in fortunes of the coveted ‘Aspirational Shopper’ was well documented in 2023. As we know from Business Model Analytics, there is always a top % of customers who drive an outsized portion of spending.

In the case of luxury goods, there is a “prime” group of 5% of consumers who account for 40% of sales. Those prime consumers spend more than $43,000 on luxury goods each year, while the remaining 60% of sales come from consumers who spend less than $2,200 per year.

The Role of Farfetch and eCommerce Platforms

The above section paints a picture of increased competition in the market between brands for those coveted “prime” consumers who will continue to shell out money in a tighter market.

When Farfetch entered the market more than a decade ago, it certainly was not the first of its kind on the market. There was Net-a-Porter, Yoox, and a slew of others.

Farfetch’s original ‘inventory lite’ business model was built on an innovative and customer-centric approach to eCommerce. The company pioneered a model that let consumers order their preferred brand – regardless of location – and have it shipped to them in a seamless way as a Farfetch-branded product.

Discovery of new products was made simple, execution of the delivery was made seamless by Farfetch’s back-end ordering system, and returns (if necessary) were done through a network approach among 3rd party retailers and brands.

It wasn’t just a better eCommerce platform for luxury brands, it was a better Customer Experience (CX) from end-to-end.

At its peak, the company was acquiring customers for around $100, and making a Take Rate of approximately 30% on AOV (Average Order Values) of over $600 (ie. ~$200 in Net Revenue). They also had a large % of returning customers, meaning they had strong LTVs (Lifetime Values) per customer.

Those are great Unit Economics at scale. The company traded at nearly a $25 Billion valuation at its peak, yet was recently rescued in a $500 Million deal by South-Korean based Coupang.

When the company went public in 2018, it was a lucrative business model because the market for luxury consumers was expanding and they were ahead of their competition.

Many mistakes were made over the last several years, but their core mistake was overspending on marketing in a declining market. Combined with being spread too thin and attempting to make up for lost ground in somewhat gimmicky ways, Farfetch’s ship all but sank in late 2023.

The company continues to exist under new ownership, but many luxury brands have already pulled themselves from the FPS (Farfetch Platform Solutions) side of the platform. This means that while consumers will still see the top luxury fashion goods on the platforms, they will be from 3rd party boutiques, not from the brands themselves.

Platforms’ role in shaping the consumer’s eCommerce experience is not something that brands can fully replace through their own initiatives.

In the same way many consumers find luxury clothing they like through luxury boutiques and department stores (whose business models are also under pressure), the role of 3rd parties in discovery remains a significant part of the ecosystem.

Whether or not Farfetch ever truly had a moat remains debated, and like any public company, there were always differing opinions around valuation and sustainability of the business model. But in their prime, they built a model that advanced the market as a whole and earned them a respectable margin for their efforts.

The Next Farfetch?

Farfetch’s rise was timed with the rise of eCommerce as a whole.

As technology has developed via companies like Shopify, eCommerce has become progressively easier to execute on for less sophisticated players.

Couple that with the trends listed above around inflation concerns, margin pressures, and rising CACs, and it means that the ‘next Farfetch’ is not likely to come from the clutches of eCommerce itself.

New trends around ‘social commerce‘ have germinated out of Asia, principally, and they introduce several relatively new principles to the eCommerce market as a whole:

  • the inception of ‘live commerce’ where commerce happens on livestream (live shopping)
  • Influencer-driven campaigns on platforms like TikTok Shop and other more performance-based models where compensation is tied to success of the campaign
  • new technologies and techniques that seek to minimize returns and enhance customer satisfaction using video

All of these “trends” can create new types of customer-acquisition channels beyond Paid Ads, and have the ability to dramatically influence CAC at scale for those who can execute on it.

Functionally, the next layer will be more social, more experiential, and more fluid compared to current eCommerce experiences.

Incremental strategies to lower CAC on major Digital Advertising platforms probably won’t move the needle for the luxury eCommerce platforms of the future. It is more likely that the innovation comes around ‘live commerce’ where exponential gains can be made for those who can execute in creative and efficient ways.

These trends are just now spreading into Europe and the USA, where the majority of luxury consumers still reside.

That’s why if another Farfetch were to emerge in the next couple of years, it will likely piggyback on the above-mentioned ‘trends’ in these markets and figure out how to scale them.

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