VOGUE BUSINESS | MAGHAN MCDOWELL
Farfetch’s true value may rest with its FPS technology rather than its marketplace. That’s a message the company is eager to put across to brands.
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Inspired by the California gold rush, Silicon Valley investors often use a Mark Twain-inspired mantra: it’s more profitable to sell picks and shovels than it is to mine for gold. And luxury fashion retail platform Farfetch wants to sell its own brand of picks and shovels to the luxury industry.
Farfetch is working harder to promote what it calls Farfetch Platform Solutions, or FPS, a growing suite of “pick-and-choose” tools that essentially white-label technologies originally developed by Farfetch for its own marketplace. The approach is akin to what Amazon did with Amazon Web Services, its cloud computing technology, which now makes up 10 per cent of Amazon’s total sales and continues to drive Amazon profits.
The backend of the e-commerce business is where a number of companies are now competing for an Amazon-style breakthrough. Farfetch rival Yoox Net-a-Porter, which has its own tech hub in west London, is touting its technology. Logistics is also in the mix: JD Logistics, the delivery subsidiary of China’s JD.com, is planning a $3.4 billion IPO in Hong Kong at the end of May.
The challenge for these companies is to sign up brands and retailers in large numbers. The provision of FPS on a large scale would enable Farfetch to make a commission on a far greater percentage of the $300 billion sales of luxury fashion than through its own marketplace, Farfetch.com. “We were a $3 billion company in GMV last year, so we’re one per cent of the market,” says founder and CEO José Neves, speaking after the company’s Thursday earnings call. “Our mission is to be the global platform for luxury. We’re a tech business — this is a very, very large opportunity.”
Neves points out that Farfetch Group invests $200 million a year in technology and has 1,000 engineers, so it doesn’t make sense for other fashion retailers to mimic that level of investment when they can just white label what Farfetch has already created.
In its Q1 earnings, Farfetch reported revenues up 46.4 per cent, more than expected, sending the stock up 16 per cent last Friday.
FPS is not a new launch or even a new priority. The company is still known primarily for its Farfetch.com marketplace rather than the broader and diverse group of businesses and services that make up Farfetch Group. The company has plenty to do to put across its message. “FPS is the enterprise area of our overall Farfetch business. Most people think of Farfetch.com and don't realise we are a platform company,” says Farfetch chief platform officer Kelly Kowal, who has been working on FPS for the past six years.
FPS covers everything from global payments and cross-border fulfilment to in-store apps. Its most recognised services, perhaps, include running brands’ websites (also offered by Yoox Net-a-Porter) and selling brands directly on the Farfetch marketplace (rather than through independent boutiques listed on Farfetch). Kowal likens it to pick’n’mix candy, with clients creating bespoke solutions from a range of options.
“I love the Amazon analogy,” says Michele Romanow, co-founder and president of Clearco, which has invested more than $2 billion in 4,500 e-commerce companies. “Originally, it would have felt strange to have your website hosted by Amazon. But they took everything that was a cost centre and said, “Look, we could make money on that. Technologies are getting better multiples than fashion or luxury houses in many ways. Farfetch is taking advantage of a good opportunity.”
E-concessions as a service
Farfetch is now pushing what it calls “e-concessions as a service”. This means that Farfetch can handle the sales of a brand made through a multi-brand department store’s website. The department store doesn’t need to buy or hold inventory (as in a traditional wholesale relationship), as Farfetch directly “plugs in” to brand stock systems. This is similar to concessions in a physical retailer, with the brand essentially “renting” space on the store floor. E-concessions enable multi-brand retailers to offer a greater assortment of a brand’s inventory, as it can list the same products across multiple sites from the same “bucket” of inventory.
In other words, Kowal explains, the same product might appear simultaneously on a brand’s owned website, on Farfetch.com and a luxury department store’s website. FPS technology would be fulfilling the order using the same technology and the same inventory pool. The concept aims to reduce the risks that brands take in allocating inventory across multiple retailers, sites and stores.
Early adopters of this FPS service are two British names — Harrods.com, an ongoing FPS client, and Burberry. Early results in the first few months for Burberry’s performance on Harrods.com are promising. The goal is to make Harrods.com a more attractive place for customers and to make selling on Harrods.com a more appealing proposition for brands leaning into direct-to-consumer sales and tighter wholesale relationships.
SOURCE: FARFETCH, ARTWORK: VOGUE BUSINESS
A new kind of relationship between brands and retailers could emerge. “Clearly, the brands want to have their own dot com and control it. And, simultaneously, lots are pulling back on retail distribution with wholesale partners, particularly with department stores,” says luxury fashion consultant Robert Burke. “I think there is a good opportunity for speciality stores and retailers like The Webster or Dover Street Market.”
He notes a move towards a so-called “drop-ship” model, in which retailers list items for sale, but the brands themselves fulfil orders. Burke points to Nordstrom and Hudson Bay, which were both able to dramatically increase the number of styles offered.
In an earnings call last week, Burberry CEO Marco Gobbetti referenced a shift in how it works with third-party platforms: "Third-party is definitely going to be an important part of our digital ambition plan. We have very strong partnerships, and we are focusing on a few key partners. You will see us doing more and more partnerships and also tightening the relationship with them and moving more into real partnerships with a few players." (Neither Burberry nor Harrods responded to requests for comment about FPS.)
Other FPS clients include Zegna, Proenza Schouler, Ami Paris, Chanel, Thom Browne, Brunello Cucinelli and French department store Printemps. Kowal and Neves are hoping to attract other brands and department stores — even multi-brand e-commerce sites that compete with Farfetch’s own marketplace, such as Mytheresa or MatchesFashion. “It would be fantastic,” Neves says. “We want to partner with the best curators in the world... They have very, very strong brands that have a very strong point of view. We believe they would benefit greatly from our platform, and we would love to have them.”
Chanel (left) uses Farfetch technology in stores and online, although it does not sell core products online; Thom Browne (centre) uses FPS throughout the business, including its in-store “operating system”; Burberry (right) uses FPS for international distribution and Harrods.com e-concessions. HANDOUT, PETER WHITE AND BURBERRY VIA GETTY IMAGES
While helping competitors might seem disingenuous, Clearco’s Romanow says it would make the most of Farfetch’s strengths in the long term. “It is very hard for non-tech companies to build tech or for Harrods to become amazing at a digital supply chain,” she says. “I just want the package in an hour, and [maybe] they don’t have the supply chain to do that. That is probably what Farfetch has become better at, and that is a better business than being a retailer.”
It’s also a way to capitalise on the ongoing DTC push. “The brands are in control,” Robert Burke says. “I imagine that Farfetch is reading the writing on the wall. It’s best to partner than compete.”
Neves considers the Amazon comparison flattering. “Amazon thought, ‘OK, we invest in all these servers, all this cloud infrastructure for our business. How amazing would it be if we give this to our sellers?’ That would make them more efficient and make a tighter partnership with Amazon, but they ended up expanding to a fully fledged cloud business, and it’s actually the most profitable part of Amazon,” he says.
While FPS isn’t focused on cloud computing, it is the same philosophy, he says. “We look at the investments we've made in building this platform — global logistics capabilities, dozens of payments systems. These are incredible capabilities, and we see that this is what luxury businesses need to operate at scale and operate globally. There's a huge opportunity to white label this infrastructure.”
The complexity challenge
The issue remains that FPS services are not widely recognised or understood. “It’s really complex,” says Burke. “There are so many facets of our business that people don’t understand,” Kowal concedes.
How to shift perception of Farfetch from a luxury marketplace to a tech provider is a “good question”, Neves says. “It's relatively new compared with the marketplace.” To that end, Farfetch held an event this month for 100 brands and retailers to discuss its vision for Luxury New Retail, an umbrella term for services that include FPS. Romanow says that investors are wising up to the business model, too. “When investors see where there is continuous recurring revenue, it gets the best valuation.”
China will have an important role to play. Last November, Alibaba and Richemont invested $500 million – $250 million each – in Farfetch China, taking a combined 25 per cent stake in a new joint venture. That includes the launch of Farfetch on Alibaba-owned Tmall Luxury Pavilion, the cross-border marketplace that connects Chinese consumers with international brands online. “China is a huge focus for us and clients and retailers,” says Kowal. “It’s a big part of our overall strategy.”
Kowal says that giving more access to advanced technology would enable brands to invest and focus on customer experience, curation and their own brand identity.
There’s a long way to go — Farfetch doesn’t break out figures for FPS. Its executive team remains upbeat and confident. “We have so many different products and services for luxury consumers and brands and retailers,” says Kowal. “We are looking to change the future of retail and truly blend offline and online.”