LONDON — All hail the platform: Farfetch said it foresees taking a large slice of the online luxury boom as it embarks on life as a public company — and eyes further acquisitions.
“The size of the opportunity is far larger than what Farfetch is today,” founder José Neves asserted Monday as the London-based firm filed its hotly anticipated registration statement for an initial public offering in New York. “I believe a single company will orchestrate this revolution in the conversion of off-line and online luxury retail because, even if multiple retail-tech vendors emerge, the new technology will have to be adopted both by retailers and consumers. We believe consumers will always gravitate to one single app, forcing vendors to gravitate to one single platform, most likely a platform that has already built consumer-side critical mass and benefits the entire ecosystem.”
Although the prices and number of shares remains vague, the listing could value the company at up to $5 billion, analysts say.
According to a regulatory filing with the Securities and Exchange Commission on Monday, the shares will be listed on the New York Stock Exchange under the symbol FTCH. Net proceeds from the IPO will be used to “fund growth and other general corporate purposes, including possible acquisitions.”
Farfetch noted its purchase of British fashion and luxury goods boutique Browns in May 2015, and how that has helped it “understand the luxury fashion ecosystem through the lens of a boutique.” Other than Browns, the company doesn’t own any of the inventory on its site and therefore does not control the pricing strategies of the retailers and brands it works with on its platform.
As for future growth opportunities, Farfetch said in the filing, citing a Bain & Co. report, that the global market for personal luxury goods is estimated to be worth $307 billion in 2017 and is expected to reach $446 billion by 2025. According to Farfetch, the Bain study concluded that the personal luxury goods sector is characterized mostly by family-controlled firms, brand integrity, longstanding relationships and fragmented supply. The report also noted that Millennial and Generation Z online shoppers accounted for 85 percent of the growth in luxury fashion in 2017, and are expected to represent 45 percent of the total luxury fashion spend by 2025. And while luxury fashion consumers have traditionally been from Europe, the Americas and Japan, Bain concluded that over the next decade, growth of the luxury market is expected to be driven by demand from emerging markets such as China, the Middle East, Latin America and Eastern Europe.
The U.K.-based firm said its technology platform connects the global consumer base as the global luxury market continues to evolve, “driven by an accelerating shift of consumers to online discovery and purchase, the increasing importance of Millennials and the growth of luxury consumption in China and other emerging markets.”
According to the filing, the company said its Farfetch Marketplace is the “source of over 90 percent of our revenue.” And as of June 30, the platform “connected over 2.3 million Marketplace consumers in 190 countries to over 980 luxury sellers,” the filing said. It also noted that for the 2018 spring season, the platform had 5.7 million stock units available on the site, with a stock value of $2.4 billion. The platform provides consumers with access to more than 3,200 different brands. About two-thirds of the sellers on the platform are retailers, with the remaining one-third comprised of brands. Further, the company said 98 percent of the retailers who sell on the site “have entered into an exclusive relationship with us.” Farfetch said the average order value for the six months ended June 30 was $622.10.
The company has selected Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC to be its primary underwriters. Credit Suisse Securities LLC, Deutsche Bank Securities Inc. and BNP Paribas Securities Corp. have also been chosen to work on the IPO.
In a statement provided alongside the filing, Neves pointed to the platform’s ability to merge physical and online retail as its biggest strength, and tap into the market’s current needs to fuel further growth in the future.
“The luxury industry has been consistently growing at a 6 percent compound rate for the past 20 years, which means — if we assume the same pace of growth — in the next 10 years, it could reach well over $450 billion,” Neves said. “By then, 25 percent of sales are expected to happen online. We believe the 75 percent of sales still happening in physical retail in 10 years will be revolutionized by digital technologies,” he added. “In fact, the distinction between off-line and online retail will vanish, as consumers will not be able to tell where one started and the other finished. This is what we call at Farfetch ‘augmented retail.'”
Neves also pointed to the pattern of disruption happening in other sectors such as music and travel, which indicate that today, a platform is more relevant than a retailer, brand or conglomerate.
According to Neves, luxury is bound to follow suit and a platform like Farfetch will become the leading player, holding significant market share — up to 60 percent — for its ability to bring “curators, creators and customers” all under one roof.
“This all translates into a potential $450 billion addressable market for Farfetch, which, as the operating system for luxury, we want to transform, empowering individuality for consumers, curators and creators of fashion,” he added.
Retail analysts were all quick to praise Farfetch’s move and highlight its leadership in the market.
“The rise of Farfetch is testament to the exceptional leadership of José Neves, and the tremendous strength we have in the U.K. in developing and scaling world-leading luxury e-commerce. Farfetch redefined what’s possible in high-end digital retail — it’s no surprise the Farfetch IPO is one of the most hotly anticipated events of the year,” said Helen Brocklebank, chief executive officer of Walpole, which awarded the retailer its British Luxury Digital Award last year.
Ludovic Grandchamp, partner at Savigny Partners, spoke of Farfetch as “the king of the luxury goods marketplace” and said that with 2.3 million consumers, the IPO is bound to be a big success.
“It’s a big consumer brand with ever-growing awareness. Brands in the luxury industry want to give customers a seamless experience and the marketplace model works for that,” he added, explaining that it’s often more beneficial to leave room for the brand to do the talking instead of a retailer trying to take over control of the customer experience.
George Wallace, ceo of MHE Retail, also sees the development as a much-needed boost for the otherwise dire retail sector, testament to both Neves’ leadership and Natalie Massenet’s contribution. The e-commerce pioneer joined the board of the Farfetch group last year as a non-executive co-chairman.
“Farfetch brings together all of the things that are attractive in the market at the moment: It’s at the forefront of technology and luxury, it’s international and it’s got growth potential, so it ticks so many boxes that investors will be very keen on, even though it’s quite substantially loss making at the moment. It’s also got Natalie Massenet in the business, so with her fantastic profile and record [it] adds further interest,” he said, adding that the proceeds will most likely be used to expand into new territories and develop new technology such as AI.
According to Wallace, once the company achieves scale, it will also be able to reverse its loss-making pattern and become profitable.
“It’s an important milestone for luxury business and the online sector. Just 10 years back, the luxury business was very dismissive of online and major labels like Dior thought they would never sell digitally but then the penny started to drop and everyone started offering their goods online, broadcasting their fashion shows or creating see-now-buy-now collections, as in the case of Burberry,” he added.
Following the IPO, Farfetch will have Class A and Class B shares, with each class identical except voting and conversion rights. Class A shares are entitled to one vote and are not convertible. Class B shares convert into Class A shares upon certain transfers and other events.
At the same time of the planned IPO, Kadi Group Holding Ltd., an existing shareholder and affiliate of JD.com Inc., plans to purchase additional Class A shares in an amount that would give it one-third of the Class A to maintain its current ownership percentage. Kadi will not make the purchase if the underwriters exercise their option to purchase additional shares, the filing said. Kadi acquired its initial shares of Farfetch on June 21, 2017. In addition to its strategic relationship with JD.com to help it grow in China, Farfetch said it also has one with the Chalhoub Group for the Middle East.
The company uses a revenue-share model, which gives it a commission on sales, as well as related income from those transactions. For the year ended Dec. 31, 2017, the company had 935,772 active consumers, up 43.6 percent since the end of 2016. It posted a loss for the year of $112.3 million, or $2.62 a diluted share. Revenues were $386 million last year, up 59.4 percent from 2106. For the first half ended June 30, 2018, the loss widened to $68.4 million, or $1.42 a diluted share, from a net loss of $29.3 million, or 75 cents, a year ago. Revenues rose 55 percent to $267.5 million from $172.6 million.
Farfetch has been making a big push into China, particularly after scoring a $397 million investment from JD.com. Last year it also introduced 90-minute delivery services in Shanghai, Beijing and Hong Kong, with Yves Saint Laurent being among the first luxury labels to utilize the service.
“Every single brand that we meet with is asking about China. Brands are now comfortable with the fact that the majority of sales are coming from China and Chinese shoppers and they are looking for solutions to be more visible in the market and to talk to the customers in a local way,” said Giorgio Belloli, Farfetch’s chief commercial and sustainability officer.
The platform has also been spearheading partnerships with major luxury brands, including Burberry and Chanel, helping them strengthen their digital presence.
Burberry has been working with Farfech to integrate its entire global inventory on the platform to strengthen and expand its distribution. As for Chanel, which is yet to make the majority of its inventory available online, it’s working with the platform to incorporate more digital features within its physical stores, in line with Farfetch’s Store of the Future that aims to link online and off-line retailing.
Earlier this year, it also debuted a hard luxury hub, aiming at growing its fine jewelry and watch offer online.
While fine jewelry has been a hot category for e-commerce players across the board, Farfetch said it has an advantage given its Millennial-focused clientele and its marketplace model, which allows jewelers to choose the stock they upload online and move product from their physical locations through the platform — which also speaks for the company’s general advantage on its competitors.
“We are very different from other retailers. We’re not just approaching the categories differently, but we also have a different customer. We’re very Millennial-focused, it’s a much younger demographic compared to others. So we are exposing these categories and the brands to a new audience,” Belloli said.
Expanding its seller network has been another priority for the platform, which has so far been working with multibrand boutiques globally. Last March, it announced its first department store partnership with Harvey Nichols and plans to embark on a wider department store strategy that will see more department stores from multiple geographies be integrated onto the Farfetch platform, a move that is in line with the company’s mission to become “the ultimate platform for luxury fashion.”
“Department stores are amazing curators of fashion and it was always part of our evolution to selectively bring department stores on board,” Neves said at the time of the announcement. “We started with boutiques, which remain a core part of our DNA, and in 2015, we expanded to brands selling directly on the platform. We now have over 300. For us, it’s all about being the platform for the luxury industry at a global level.”