Farfetch: Global Fashion Online & In-Store
A marketplace that integrates the online and in-store shopping experience and whose operating model could teach its peers in traditional ecommerce a thing or two.
What do Studio 14 in Casablanca, Morocco, American Rag in Los Angeles, California and Astraet in Tokyo, Japan all have in common? They are 3 of over 300 global fashion boutiques featured on Farfetch, an online retailer of high-end fashion for men and women. The Company is privately owned and in 2015 was valued at $1 billion through its Series E financing round.[1]
Business Model
Farfetch owns and manages an online marketplace that connects sellers (i.e. boutiques and brands) to buyers (i.e. shoppers) of high-end fashion from around the world. Farfetch has truly globalized the fashion market by providing consumers direct access to merchandise that would otherwise be unavailable in their home locations. This business model also creates value for boutiques. Traditionally, smaller retailers have struggled to compete with the web presence of department stores and their large expenditures on digital marketing campaigns and search engine optimization.[2] Through the Farfetch platform, boutiques achieve this scale in addition to a much larger customer base. Farfetch captures value by charging a 25 percent commission on all purchases.[3]
Farfetch’s strategy is the epitome of “Omnichannel” retailing, which integrates online and offline commerce wherever possible; allowing consumers the breadth and convenience of online shopping, with the ability to trial products in brick and mortar stores.[4]
Operating Model
The successful alignment of Farfetch’s operating and business models has driven the achievement of its global multi-channel retailing strategy. As discussed below, its operating model also has distinctive advantages over those of its peers in traditional ecommerce, such as Net-A-Porter or Shopbop.
No Inventory Risk
In the traditional wholesale ecommerce model, firms buy merchandise which they hold as inventory in large warehouses until consumers make purchases. As a result these firms face significant inventory risk and large working capital requirements. In contrast, Farfetch’s boutiques effectively act as individual warehouses—fulfilling orders directly whenever a consumer makes a purchase through the website. Consequently, Farfetch takes no inventory risk and maintains low working capital requirements, freeing up capital to invest in global expansion and boutique recruitment.[5] Additionally, given traditional ecommerce firms’ large and relatively few warehouses, consumers have limited opportunities to test merchandise (which is a drawback when purchasing expensive clothing). Farfetch’s operating model distributes inventory globally, allowing consumers greater opportunity to test merchandise in-store after purchasing online.
Technology Brings Omnichannel Strategy to Life
Farfetch’s operating model successfully utilizes technology and analytics to integrate online and in-store shopping experiences in new and creative ways. The Site’s “Click and Collect” feature allows consumers to pick up a purchased item at a boutique, try it on and return it over the counter. Inventory management analytics are also in place to help boutiques manage across online and in-store purchases.[6]
Farfetch’s proprietary technology is also an asset when convincing boutiques to join the marketplace. All of Farfetch’s content is API-based, which enables stores to easily integrate the Farfetch shopping channel with their pre-existing web services. Additionally, the Company has developed a proprietary algorithm to allocate sales if two vendors are selling the same product.[7]
Consistency of Experience
Farfetch’s operating model ensures a consistent shopping experience across boutiques and provides the customer service perks associated with luxury shopping. The Company’s account management team actively recruits and vets new boutiques to make sure they will appeal to its target demographic. In addition to a centralized customer service center, Farfetch pays for all merchandise photographs displayed on the website to ensure consistency. It also provides the same packaging to all boutiques, has negotiated low-cost international shipping rates and offers a standardized return policy.[8] These features ensure a reliable shopping experience that is easily replicated globally.
Success…For Now
Like any marketplace, Farfetch is dependent on network effects to attract an ever larger number of shoppers and boutiques to its platform. It will be challenging for competitors to replicate the scale Farfetch has achieved within the high-end fashion segment because of its first mover advantage and the alignment of its operating and business models around a multi-channel strategy.[9] As of May 2014, Farfetch averaged 7 million page views each month and the average order size was $650.[10] Gross merchandise volume is currently projected to reach $500 million in 2015, implying estimated revenues of $125 million.[11]
Going forward Farfetch faces two primary challenges. First, because Farfetch’s business model is dependent on its boutiques and the revenue they generate, it will need to strike a fine line between seeking to develop its own brand while continuing to promote its boutiques.[12] Second, Farfetch will face increasing competition as luxury brands look to develop their online presence and ecommerce platforms. In 2015 the Company announced Farfetch Black and White: an independently run business segment that enables brands to utilize Farfetch’s API infrastructure to launch their own online retail initiatives.[13] It is too early to tell its success.
Sources:
[1] Kansara, V. A. (2015, September 9). Farfetch Opens E-Commerce Platform to Brands. Retrieved from Business of Fashion: http://www.businessoffashion.com/articles/bof-exclusive/farfetch-e-commerce-fashion-brands-omnichannel.
[2] Sherman, L. (2013, April 17). Farfetch’s New Retail Plan Could Revolutionize E-Commerce. Retrieved from Fashionista.com: http://fashionista.com/2013/04/farfetchs-new-retail-plan-could-revolutionize-e-commerce.
[3] Sherman, L. (2014, May 1). Like a High-Fashion Etsy, Farfect Puts the World’s Rarest Fashion at your Fingertips. Retrieved from Fast Company: http://www.fastcompany.com/3029848/like-a-high-fashion-etsy-farfetch-puts-the-worlds-rarest-fashion-at-your-fingertips.
[4] Kansara, V. A. (2015, 5 April). Farfetch’s Global Platform Play. Retrieved from Business of Fashion: http://www.businessoffashion.com/articles/fashion-tech/farfetchs-global-platform-play.
[5] Kansara, Farfetch’s Global Platform Play, 2015.
[6] Kansara, Farfetch’s Global Platform Play, 2015.
[7] Kansara, Farfetch’s Global Platform Play, 2015.
[8] Sherman, 2014.
[9] Court, F. (2015, March 6). Farfetch’s journey to a $1bn valuation, blending creativity and technology to form a European Unicorn. Retrieved from Medium.com: https://medium.com/@fcourt/farfetch-s-journey-to-a-1bn-valuation-blending-creativity-technology-to-form-a-european-unicorn-f6626df48bd#.kl6i16wwo.
[10] Sherman, 2014.
[11] Kansara, Farfetch Opens E-Commerce Platform to Brands, 2015.
[12] Sherman, 2014.
[13] Kansara, Farfetch Opens E-Commerce Platform to Brands, 2015.
Interesting post, Evelyn! I hadn’t heard of Farfetch before reading your analysis.
One thing I wondered is how much scale is “too much” for this business? Since luxury retail is often associated with a certain level of exclusivity, is being too accessible or far-reaching a detriment for Farfetch’s brand, or for the brands of the boutiques it features? If Farfetch is too inclusive, will it ultimately stray away from the high-end fashion its core customer has come to expect?
Evelyn, I’m so happy you wrote a post about a Portuguese company! Farfetch is the epitome of Portuguese entrepreneurship.
Indeed, the omni-channel strategy is one of the key vectors of Farfetch business model, and in line with that they have recently acquired London boutique Browns to develop and test retail and omni-channel solutions. For additional information on this acquisition, the article below is very good!
http://www.businessoffashion.com/articles/news-analysis/browns-acquired-by-farfetch-as-part-of-omni-channel-growth-strategy