Farfetch: anatomy of a fall

Farfetch anatomy of a fall

Farfetch was a lovely entrepreneurial adventure launched 16 years’ ago by thirty-something Jose Neves, but will probably not stand the test of time, in its current iteration. Let’s analyse what and who drove Farfetch, and how Farfetch was driven, into the ground, in less than 5 years. We all need to hear cautionary tales, and the Farfetch story definitely fits into this category. Future fashion entrepreneurs, saddle up!

1. What is Farfetch?

Farfetch was incorporated at Companies House in October 2007 as the private company limited by shares ‟Far-fetch.com Limited”, by Jose Neves, a Portuguese national, in London, United Kingdom (‟UK”).

The company name was changed twice, in May 2010 and then June 2013, with the name ‟Farfetch UK Limited” still in existence, today.

In 2007, Jose Neves’ vision was to create a business that would use the same technologies that were transforming other consumer sectors, such as the music and film sectors, for shopping fashion products. His plan was to ‟create a world-class infrastructure supported by a top-notch team, and then put all that to the service of the world’s most interesting retailers and their websites”.

Since some of the best brick-and-mortar fashion boutiques around the world, despite having a powerful eye for curation, were not able to fund, set up and manage their own e-commerce operations to scale their businesses beyond their local markets, Farfetch seemed to bring them an appropriate solution.

This, combined with the fact that Farfetch did not take on the risk of owning inventory made it a compelling business model that attracted the interest of venture capitalists, such as Advent Ventures (now Felix Capital) and its founder Frederic Court.

Mr Neves and its venture capital investors pushed, over the years, Farfetch to expand and grow to realise the vision of becoming the Amazon of the fashion industry, a platform upon which the whole industry could operate its e-commerce businesses.

Today, Farfetch, one of the few global online retailers for high-end merchandise from a range of labels, works with more than 1,400 fashion boutiques and sellers, in 190 countries.

In 2015, Farfetch bought Browns, the London fashion boutique, which had a flagship store on Brook Street. Now, the brick-and-mortar location of this flagship store is disused and vacant, in Brook Street, London.

As consumer appetite for buying luxury goods online began to grow, Farfetch also started working directly with fashion brands to build their websites and back-end operations. Through Farfetch Platform Solutions, the company also offers a host of e-commerce services to brands, like Burberry and Ferragamo, and department stores, like Harrods and Bergdorf Goodman.

In 2017, Farfetch bought the intellectual property from Condé Nast’s failed e-commerce venture Style.com, a brand that the company has never used.

In 2018, Farfetch became a public company listed on the New York Stock Exchange (‟NYSE”), via Farfetch Holdings plc, a public limited company organised under the laws of England and Wales and a wholly-owned direct subsidiary of Cayman Islands-based Farfetch Limited. At the USD20 Initial Public Offering (‟IPO”) price, Farfetch debuted its IPO with an approximate market capitalisation of USD5.8 billion.

The same year, Farfetch acquired New-York based sneaker and streetwear reseller Stadium Goods, opting to pay USD250 million for the sneaker startup in a combination of cash and Farfetch stock.

In 2019, Farfetch ramped up its shopping spree, with a USD675 million takeover of the Italian holding company New Guards Group, which manages the design, production and distribution, for a range of global brands, including Off White, Reebok and Palm Angels. This acquisitive move, doubled by a report of larger than expected losses, wiped out more than USD2 billion off Farfetch’s market value in a single day, in 2019.

Unfettered, Jose Neves bought a USD200 million stake in American department store Neiman Marcus for Farfetch, and, in 2022, struck a deal to buy 47.50 percent of the shareholding of Yoox Net-a-Porter (‟YNAP”) – the underperforming e-commerce platform from the Richemont group – in exchange for the issuance of a 12 percent shareholding in Farfetch to Richemont. That partnership was cleared by the European Commission in October 2023.

Meanwhile, Farfetch acquired Los Angeles-based luxury beauty retailer Violet Grey, at the beginning of 2022, only to put it up for sale barely a year and a half later, in October 2023, further to shuttering its beauty division in August 2023.

And then, in November 2023, when Farfetch issued a press release backtracking on its initial intention to announce third quarter 2023 results, its shares started tumbling, losing more than 50 percent of their value. Mid-December 2023, two years after Farfetch’s peak valuation at a pandemic high of USD26 billion in February 2021, its market value shrunk to less than USD238 million, with its shares losing more than 97 percent of their market value since its IPO.

In Mid-November 2023, British investment firm Baillie Gifford, formerly Farfetch’s largest investor, sold nearly half of its shares in the platform, keeping a 7.53 percent stake only.

On 18 December 2023, Farfetch provided a business update, confirming that it had entered into an emergency and lifeline USD500 million bridge loan facility with Athena Topco LP, a Delaware limited partnership owned by South Korean e-commerce group Coupang, Inc (also listed on the NYSE and backed by SoftBank Group Corp). In exchange, Farfetch will delist from the NYSE and a partnership between Coupang and the investment firm Greenoaks Capital Partners will acquire Farfetch through a pre-pack administration in the UK, which is a quick process used to facilitate selling all or parts of the assets of an insolvent company.

Via the same business update, Farfetch also informed the public that its partnership with Richemont, to purchase 47.50 percent of YNAP, the adoption of Farfetch Platform Solutions by YNAP and the Richemont Maison, as well as the launch of Richemont Maison e-concessions on the French marketplace, had terminated with immediate effect.

Farfetch’s shares on the NYSE were suspended after slumping 35 percent in premarket US trading before the public announcement on 18 December 2023.

2. How, and why, is Farfetch in such dire straits?

A combination of factors have brought Farfetch to the brink of extinction, many of those self-inflicted.

Firstly, Farfetch veered too far away from its cautious approach to fashion e-commerce, jumping with both feet, from 2015 to 2023, in overpriced, underprepared and badly-executed multiple acquisitions of brick-and-mortar fashion brands and retailers and etailers, as well as their inventories.

Not only did this scattered M&A strategy massively increase the financial risks underpinning Farfetch’s business, but it also seriously emptied the coffers of this startup (whose current cash flow resources stand at USD630 million), and saddled it with debt (in particular, USD600 million of convertible notes, shared equitably between Richemont and Alibaba Group Holding Limited, to be converted into cash or shares in 2026).

Also, Farfetch’s erratic growth approach, without a well-thought business plan, caused both the fashion industry and unforgiving financial markets such as the NYSE, to no longer understand the company’s increasingly complex vision.

And, Farfetch never consistently made a profit, since its IPO. So, investors, stakeholders in the fashion industry and financial markets doubt that it may be able to get back on track.

Moreover, clearly, the leadership at Farfetch, and in particular Jose Neves, is incompetent. Although Mr Neves currently owns only 15 percent of the company’s shareholding he founded in 2007, he still has 77 percent of the vote on Farfetch’s executive committee. While he sacked all independent members of Farfetch’s board and all committees of Farfetch, as confirmed in the business update dated 18 December 2023, the board still consists of … Jose Neves. It is probably the insistence, by Jose Neves, to keep on staying at the helm of Farfetch, despite his proven track record of incompetence and poor management, that has ultimately deterred the likes of Amazon, Alibaba, LVMH, Richemont and Kering, from rescuing Farfetch out of its misery: they know that, while Mr Neves is in charge at Farfetch, nothing good can come out of it.

Finally, the economic conditions for etailers are tough, post-pandemic, as luxury e-commerce players such as Farfetch, Mytheresa and Matchesfashion currently experience. MyTheresa’s shares have lost 90 percent of their value since the pandemic boom of 2021, and Matchesfashion has just been acquired by the Frasers Group, for just GBP52 million, in a deal that signals heavy losses for its private equity backer Apax Partners. The longer-term challenge of luxury e-commerce platforms is a drive among fashion labels to seek greater control of their products, usually at their own retail boutiques – a strategy aimed at avoiding discounts that third party retailers like Farfetch and Mytheresa rely on to attract shoppers. Now that consumers are back to shopping in person, it is a trend that luxury brands prefer to control their own distribution.

3. What’s next for Farfetch?

The deal between Coupang and Farfetch, announced in December 2023, will be a catastrophe for Farfetch in the medium to long term. Indeed, while such a transaction gives Farfetch a bit of a breather in terms of keeping its network of brands, boutiques and consumers depending on the Farfetch marketplace up and running, for now, there are very few synergies (if any) between a basic, cheap, retail e-commerce platform like coupang.com, and a luxury e-commerce marketplace such as farfetch.com.

There is no chance that the Korean management of Coupang will ‟get” the exclusive and elitist distribution strategy of its asset farfetch.com, with the risk of diluting the brand Farfetch by lowering the standards of selection of the boutiques selling on the Farfetch marketplace. When that happens, no fashionista or luxury shopper will ever buy anything on Farfetch again.

Also, Farfetch can kiss goodbye to its glitzy deals with luxury partners such as Richemont, Ferragamo, Burberry, etc. The positioning of Farfetch, now that it is becoming an asset of Coupang, is veering from being ‟luxury”, to ‟mainstream retail”. Also, the top brass at Farfetch will be replaced by a team of South Koreans who not only understand very little about what constitutes the makeup of a luxury brand, but also do not have the appropriate connections and pazzaz, in the luxury spheres.

While Jose Neves must go, since he continuously mismanaged and negligently drove Farfetch into the ground, the South Korean ‟new guard” who will eventually replace him will fail, if they do not quickly and efficiently buy extremely expensive knowhow and strategic advice about, and connections within, the luxury sectors in Europe and the USA, to turn Farfetch around and to keep it as a thriving going concern for the luxury fashion industry.

Crefovi’s live webinar: Farfetch – anatomy of a fall – 22 December 2023

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