#31 - Farfetch

Online luxury marketplace.

Farfetch - (NYSE: FTCH)

Farfetch is an online luxury marketplace connecting brands with consumers. IN addition, Farfetch operates various retail stores and other business lines such as providing e-commerce tools to help luxury brands operate an e-commerce store.

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Industry Overview

Farfetch competes in the broad luxury industry alongside luxury brands, other marketplaces with luxury products, luxury department stores, and other luxury focused marketplaces (TheRealReal).

There are a number of key companies in the value chain for this industry. First comes the brands that manufacture products, then comes either a retailer which the brands sell wholesale to, or the brands go direct to consumer (either through their own websites, retail stores, Farfetch, or other channels). Farfetch and luxury brands also compete with consumers or companies that sell used luxury products such as TheRealReal. To an extent, Farfetch likely also competes with other marketplaces (Amazon?) and retail stores (Neiman Marcus if it’s still around).

Farfetch has a valuable position as the marketplace connecting the supply and demand for the luxury industry. Farfetch has expanded from this primary business to offering more services for luxury brands such as fulfillment and an e-commerce solution. Shopify for luxury brands basically.

Business Overview

Farfetch is an online platform that helps luxury brands sell clothing and other items for consumers. Farfetch has a number of different business lines.

  • Farfetch Marketplace

  • Farfetch Platform Solutions

  • Farfetch Store of the Future

  • Browns

  • Stadium Goods

  • New Guards

Farfetch separates these businesses into three distinct segments, Digital Platform, Brand Platform, and In-Store.

Digital Platform includes the marketplace, platform solutions, Browns, Stadium Goods, store of the future, and any other online sales. Platform solutions is like a Shopify offering specifically for luxury companies.

Brand Platform is comprised of design, production, brand development and wholesale distribution of brands owned and licensed by New Guards and includes franchised store operations. In-Store includes stores that Farfetch operates.

The image above gives a tremendous overview of Farfetch’s various lines of businesses and the take rates associated with the first-party marketplace model.

Total Addressable Market

The global luxury market is a massive market. China and the US are the two major markets for luxury products. China has seen tremendous growth over the past couple of years and this can help explain why JD, Alibaba, and Tencent have all been invested in Farfetch at one point or another.

Most estimates have the total addressable market above $400 billion and growing low single digits. The market for buying luxury products online is growing much faster, double digits. Farfetch processed ~$3.1 billion in gross merchandise value in 2020 and has been growing by a CAGR of ~51.9% even through a pandemic which bodes well for Farfetch.

Competitive Advantages

  • Largest luxury marketplace

    Farfetch seems to be the leading marketplace dedicated to finding luxury products across the world. Brands and consumers (supply and demand) are connected on this platform and Farfetch helps to arrange this as its position as the middleman.

  • Brand and consumer trust

    With scale, continued execution, and years of building a brand as the go to luxury platform, Farfetch’s reputation is likely able to put the minds of brands and consumers at ease knowing that Farfetch is a trustworthy platform and has the interests of its stakeholders in mind.

    Over time, consumers will trust Farfetch’s platform as the one and only luxury marketplace and will have comfort knowing that the items for sale are true luxury products.

    Brands will likely continue to gain comfort over time as Farfetch becomes a more trusted partner to sell luxury goods. Brands likely don’t want to sell on Amazon, Target, Walmart, or other more normal websites and shops.

Financials

Below is a snapshot of just the basic financial results for Farfetch. Obviously Farfetch is losing a ton of money but bulls would likely argue that Farfetch is trying to reach scale and be the winner in a winner take all market (marketplaces work that way).

One thing I’d caution is that the total revenue divided by GMV is a flawed and lazy assumption of Farfetch’s take rate. In the image above from an investor presentation, Farfetch’s actual take rate is under 30%.

What’s Interesting

  • Leading marketplace

    Marketplaces are one of the most attractive businesses. While Farfetch isn’t a pure-play marketplace, the majority of its business is the marketplace and there are always additional revenue sources for the leading marketplace.

    I try to invest in companies that are the leading companies within its industry. Farfetch seems to be the winning company in this industry and has done phenomenal through the pandemic. I think this says a lot about the management team and their ability to execute during tough times.

  • JD, Alibaba, and Tencent

    One of the more interesting headlines I’ve noticed since following Farfetch for a couple of months is that at one point in time, JD, Alibaba, and Tencent have all been invested in Farfetch.

    Because China is such an important market for luxury demand, it makes sense that these three companies wanted to have a piece of the winning luxury marketplace as it expands into China and the rest of Asia.

    Having the support and backing of these three companies will likely carry Farfetch throughout China and hopefully into the rest of Asia as it expands.

Future Questions

  • Amazon, Etsy, and other marketplaces?

    What makes the luxury industry need its own marketplace? I haven’t studied Etsy too in depth, but one of the earlier bear cases was that Amazon would just take over Etsy’s niche and dominant it as the largest marketplace in the world. While Amazon can’t win everything, investors have to have an answer for why Amazon can’t move into this industry and crush its competitors. That’s my question for why the luxury industry will be independent of Amazon.

    I believe that consumers shopping for luxury goods likely don’t want to buy a luxury purse and some toilet paper in purchase. That’s probably a lazy answer, but what about other larger marketplaces? Can that answer be applied for the marketplaces in China?

  • Why do luxury brands work with Farfetch?

    Luxury brands already have a source of consumer demand because of their brand. Why do these companies need to and want to work with Farfetch to sell more luxury products? Does working with Farfetch help these luxury brands reach more consumers? Farfetch also takes a hefty take rate north of 25% so why are these brands so willing to work with a luxury marketplace?

Conclusion

I think Farfetch is likely a great business. I know lots of retail investors seem to love it on Twitter and even other notable hedge funds have large positions in Farfetch and there have been so great write-ups on the company so far.

Farfetch has an attractive business model, is led by its founder, and operates in an industry with large tailwinds. While this isn’t a full deep dive on the company, I think it is one that should be noteworthy and warrant further investigation.


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