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Our last post discussed VF Corp’s $2.1 billion acquisition of Supreme. In retrospect, Farfetch’s decision to buy NGG in 2019 looks like a steal:
Another takeaway is the importance of the Chinese market, as VF plans to leverage Supreme to boost its direct-to-consumer and digital businesses internationally. The management team at Farfetch has moved aggressively over the past year, most recently inking a deal with Alibaba, Richemont, and Artémis to double down on the world’s most populated country.
Business is booming in China
Farfetch is teaming up with tech giant Alibaba to position itself as the bridge between western brands and Chinese consumers. From Business of Fashion (paywall):
As part of the deal, Alibaba and Swiss luxury group Richemont have invested $300 million each in Farfetch, plus $250 million each in a new joint venture, Farfetch China. They’ll own a combined 25 percent stake in the new unit, valued at $2 billion, with the option to acquire another 24 percent. The Pinault family, owner of French luxury conglomerate Kering, has also upped its current stake in Farfetch by an additional $50 million through its investment vehicle Artémis, which first invested in the company at its 2018 IPO.
The deal is a major sign of support for Farfetch, cementing the marketplace’s status as the leading player in the online luxury market. It also could mark the start of a long-awaited consolidation in the space, where numerous small and mid-sized websites compete for the same pool of wealthy consumers. The biggest loser in the deal could be Yoox Net-a-Porter Group, which has seen its owner (Richemont) and Chinese partner (Alibaba) invest in its biggest rival.
Notably, Richemont Chairman Johann Rupert said he was attracted by Farfetch’s strength in technology. Alibaba Group will nominate one director to the Farfetch Board of Directors, signaling the firms’ strong commitment to each other.
Shareholders and Wall Street were pleased with the news, sending Farfetch shares soaring to all-time highs last Friday.
“This is without a doubt excellent news for Farfetch,” wrote Luca Solca, analyst at Bernstein Research. The London-based group now has the backing of two Chinese internet giants, Alibaba and earlier shareholder Tencent, as well as two luxury giants Kering and Richemont.
Farfetch said it will retain its relationships with Tencent via its presence on WeChat, where it works with 90 luxury brands via its subsidiary, the marketing firm Curiosity China. CEO José Neves said the platform remains key to building brand awareness in China.
A few slides from management’s highly informative presentation on the initiative:
Alibaba & Tmall
As we mentioned in our company overview post, Farfetch-owned Stadium Goods has a strong relationship with Alibaba dating back to 2016 and has experienced success ramping sales on Tmall.
As part of the joint venture, Farfetch will launch shopping channels on Alibaba’s e-commerce platforms Tmall Luxury Pavilion, Tmall Global and Luxury Soho.
Earlier this week, Alibaba Singles’ Day generated a massive $75 billion in GMV during the world’s largest shopping event. Alibaba extended the shopping spree to multiple days for the first time, but sales shattered last year’s record of $38 billion.
For context, Target Corporation pulled in $75.36 billion in revenue last year. I thought this was a cool view into the world of Chinese e-commerce:
Guess who else is experimenting with livestream shopping? Few details have emerged thus far, but Farfetch is partnering with Bambuser to launch a live video shopping pilot program. Watch this space.
During the recent investor presentation, Farfetch said its 18-month-old storefront on JD.com “did not ramp up as we expected.” The venture will close as part of its new partnership with Richemont and Alibaba. However, the recent move only bolsters their growth prospects.
Alibaba’s Tmall marketplace adds 757 million consumers to Farfetch’s reach, compared to JD’s 417 million. Also, Tmall is more fashion-focused versus JD’s electronics focus.
From Business of Fashion:
For luxury brands, growth will likely be driven by young consumers in China’s lower-tier cities, where it’s unusual to find a Louis Vuitton or Gucci flagship at the local mall. Over 50 percent of luxury consumers in China live in cities that are second-tier or lower, but they have limited access to luxury western brands’ store networks, according to a report by the Boston Consulting Group and Tencent.
“As we always say in the industry, whoever owns the young generation in luxury owns the future,” Judy Liu, Fafetch’s managing director for Greater China, told analysts last week.
Luxury New Retail
CEO José Neves stated, “Our mission is to be the global platform for the luxury industry.” As Farfetch scales its digital marketplace and Store of the Future capabilities across the globe, it appears to be doing just that.
The capabilities developed across Farfetch’s platform since 2008 have uniquely positioned the company for this moment.
“Luxury New Retail is not a specific technology product or solution,” Neves clarified to WWD. “It’s the division and also the full suite of solutions that we can offer brands that are completely connected. Because everything we offer brands is completely integrated and connected.”
“Everything is the same API, everything is the same data architecture and data layer,” said Neves. APIs, or application programming interfaces, are developer tools that allow different kinds of software to work together or, in some cases, share data. “Obviously we segregate data when it’s confidential for specific brands,” he added. “But it’s essentially one single platform, one single API powering all of this.”
It sounds circular, but the strategy brings a level of interconnectedness that allows a shop to serve its patrons based on a comprehensive view of the individual’s tastes, preferences, buying or browsing habits, blurring the line between online e-commerce and offline retail. It all becomes a cohesive — or in oft-used retail parlance, an “omnichannel” — environment designed to take care of the customer. (Yahoo)
Richemont Executive Chairman Johann Rupert characterized the Farfetch China venture as “a hybrid platform that will be attractive for all partners.”
Neves is positioning Farfetch as the leading operating system to power luxury retail, somewhat akin to Microsoft’s strategy of dominating the PC market via Windows OS.
Q3 Earnings Report
Yesterday Farfetch announced Q3 results, and they were nothing short of blowout numbers.
Highlights:
Gross Merchandise Value and Digital Platform GMV growth rates accelerate – up 62% and 60% year-over-year, respectively, to record highs of $798 million and $674 million, respectively
Third-party transactions generated 83% of Digital Platform GMV at a take rate of 30.4%
Revenue increased 71% year-over-year to $438 million
Adjusted EPS $(0.17) beats $(0.40) estimate
Increase in Active Consumers of 45% year-over-year; app installs increased over 70% year-over-year
Revenue growth continues to impress and demonstrates how under-penetrated the online luxury market is. All geographic regions showed year-over-year acceleration in GMV growth.
Bringing NGG brands onto the platform is proving to be a powerful customer acquisition strategy. NGG’s effectiveness in driving demand allowed Farfetch to limit promotional activity throughout Q3.
During the quarter, 75% of all transactions were done via app and mobile while overall traffic across the portfolio of sites grew 50% year-over-year. Active consumers increased to 2.7 million.
Farfetch shares exploded to an all-time high of $51.20 in after-hours trading.
During the earnings call, Neves mentioned some brands that have recently joined Farfetch’s marketplace: Moncler, RADO, Ralph Lauren, and Dolce & Gabbana, among others.
Moncler announced that it was moving off the Yoox platform (part of YNAP) earlier this year, and now works with Farfetch on certain e-commerce elements, including its business in China.
Q4 Guidance:
Digital Platform GMV of $880 million to $910 million, representing growth of 40% to 45% year-over-year
Brand Platform GMV of $85 million to $90 million
Positive Adjusted EBITDA
Items to watch
Clearly, there is a lot to be excited about. Here are a handful of metrics and developments I’m looking for more color on over the next few quarters:
Additional details related to the Chinese joint venture
At $46M, customer acquisition costs were the lowest they’ve been in two years (just 6.9% of Digital Platform GMV). How will this figure trend going forward?
Can NGG produce another hit that matches the success of Off-White?
Product diversification. Will Farfetch add other luxury goods like furniture, wine and liquor, art or automobiles to its platform?
Store of the Future—initially developed exclusively for Chanel, the concept will soon be rolled out to other brands, starting with Farfetch-owned Browns Fashion boutique
Q4 2020 and FY21 profitability
Upcoming virtual investor conferences
Disclosure: None of this is investment advice. I own FTCH and BABA shares.
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