Farfetch Holdings, the online luxury marketplace and technology platform, reached the precipice of insolvency in the third quarter. A last-minute $500 million bridge loan from the $21 billion South Korea’s Coupang gave the company a lifeline. Currently, Farfetch has a market value of $258.4 million.
Since going public in 2018, Farfetch has proven to be a black hole undone by grand ambitions without the discipline to achieve them, if that is even possible. Now Coupang is caught in its vortex and is destined to become its next victim.
The Deal
Under terms of the agreement, Farfetch will operate as a private company with Farfetch founder and CEO José Neves at the helm until the end of an exclusionary period expiring April 30, 2024. At that time, Farfetch will become a subsidiary of Coupang; otherwise, it must pay back the loan with 12.5% per annum interest.
Coupang is counting on the deal to go through. Farfetch makes an appealing acquisition since it opens the door to the $362 billion personal luxury goods market.
The company claims its home base of South Korea has the world’s highest per capita spending on luxury. Yet South Korea is an also-ran behind North America and China, which account for about half of the world’s luxury consumer spending.
Coupang, as an e-commerce marketplace platform with enhanced service offerings such as same-day and next-day delivery, believes its operations and logistical capabilities can turn the tide in Farfetch’s business.
“We see tremendous opportunities to redefine the customer experience for luxury clients everywhere,” said Born Kim, Coupang founder and CEO, in a statement, adding that Coupang is “uniquely positioned to unlock Farfetch’s tremendous value.”
It assumes Farfetch’s “leading role in the luxury ecosystem” is a game-changer and that “online luxury is the future of luxury retail.” Both of those assumptions have yet to be proven.
For example, online personal luxury sales actually declined from 2022 to 2023 for the first time, while mono-brand retail increased by 10%, according to Bain. And while Farfetch may be a player in luxury retail, it has hardly shaped a new luxury ecosystem. The leading luxury brands are doing that on their own.
After five years as a public company, reaching a market cap of $24 billion in early 2021, multimillion-dollar investments by Richemont, Alibaba and Kering, a strategic partnership with JD.com in China, operating UK-based Browns luxury boutique, acquiring Stadium Goods from LVMH Ventures and investing in Neiman Marcus Group, Farfetch has been spectacularly adept at losing money.
“It’s a total financial fiasco,” said Vijay Marolia, chief investment officer at Regal Point Capital Management, who noted his firm never took a position on Farfetch.
“People just stopped paying attention to the math on this one. A charismatic founder sold them an idea during a time when FOMO – fear of missing out – was rampant. The company didn’t have a good business model; it had great marketing and PR,” he added.
Full disclosure: I was also caught up in the excitement over Farfetch’s potential.
Luxury Marketplace Concept Unproven
E-commerce marketplaces that use digital platforms to connect sellers with buyers have been remarkably successful. Alibaba, Amazon
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In the U.S. alone, e-commerce marketplaces accounted for some $385 billion in sales, but the goods are typically offered at a significant discount to prices found in stores.
By contrast, luxury marketplaces are an unproven concept. Amazon has been trying to break through into luxury, but with little to show for it. And marketplace Matches Fashion, which the Fraser Group just acquired from private equity firm Apax Group for $66 million, has been losing money for years, with a reported loss of $43 million last year.
“For luxury brands, multi-brand marketplaces are the opposite of what an online strategy should be,” shared Jacques Roizen, consulting managing director, Digital Luxury Group, China. “There’s zero storytelling and a strong focus on discount. Their role is to help clear the stock of offline multi-brand retailers.”
Early on, Richemont gave luxury marketplaces a try with Net-a-Porter and became a majority shareholder in 2010. Then it acquired YOOX in 2015 to merge the two companies together into YNAP.
Last year, YNAP brought in $2.8 billion in revenues and lost $4 billion as reported under discontinued operations. Plans to spin off a majority stake of YNAP to Farfetch were quashed with the Coupang deal.
Originally, Farfetch was a direct Net-a-Porter and YOOX competitor. Net-a-Porter was founded in 2000 by Natalie Massenet, who, after the Richemont acquisition, joined Farfetch in 2017 as co-chairman, leaving in 2020. YOOX was also founded in 2000, and both provided a model that Farfetch copied at its founding in 2007.
“Many luxury brands are realizing that selling online is very impersonal and too transactional. So very few luxury brands want to see their merchandise sold in a marketplace environment, discounted deeply and without any storytelling that goes along with luxury consumption,” Roizen continued.
Luxury Is A Business Of Relationships, Not Transactions
In the Farfetch 2018 IPO prospectus, Neves included a letter specifying the differences between running a transactional-oriented marketplace and a luxury one.
“The luxury industry has many peculiarities. It is mostly comprised of family-owned businesses. Even the largest conglomerates, with few exceptions, are controlled by families, and the vast majority of brands and retailers are family-run,” he wrote.
Given the unique family structure in the luxury market, “Relationships are paramount, and relationships take time to build,” he rightly asserted, as the company warned it experienced losses from 2015 through 2017 and fully expected to continue to experience losses in the future because of those relationship-build times.
Yet he should have recognized such relationships can be destroyed in an instant. That’s the place Farfetch finds itself in now. Neves and Farfetch have burned their bridges, and even under new ownership, it is going to take a monumental effort to restore the luxury industry’s goodwill.
Mytheresa, the German online multi-brand retailer, that trades as MYT Netherlands Parent B.V., stands ready to grow deeper relationships with the luxury brands that have abandoned Farfetch and YNAP.
Its goodwill is growing after hosting capsule collections for some of the industry’s leading brands, including Moncler, Valentino, Loro Piana, Dolce & Gabbana, Bottega Veneta, Gucci, Pucci, Loewe, Givenchy, Brunello Cucinelli, The Row, Missoni and Manolo Blahnik.
Mytheresa carefully distances itself from marketplaces under what it calls a “curated platform model.” That is, it curates products like a department store and holds inventory in its warehouse for immediate shipment, but doesn’t own the products. Instead, it books a fee from sellers after the sale.
Of note, Mytheresa was initially owned by Neiman Marcus Group, but was spun off during NMG’s bankruptcy in 2020, so it shares some of Neiman Marcus DNA.
Sales, Not Profits
Luxury players and the investment community got caught in Farfetch’s web by its impressive topline performance. At the time of its IPO, Farfetch reported gross merchandise value of $910 million and revenues of $386 million. And it had the support of 989 sellers – 614 retailers and 375 brands –and nearly one million customers.
In 2021, its peak year, gross merchandise value reached $4.2 billion and revenues of $2.3 billion on relationships with over 1,400 sellers and 3.7 million customers.
That year was also the first time it generated a profit of $1.5 billion and positive adjusted EBITDA of $1.6 billion, a 0.1% EBITDA margin. It was also in February of that year when Farfetch reached its maximum market cap of $24 billion.
Then, the tide started to turn, with its market cap dropping to around $5 billion in March 2022 and continued to dive. Fiscal 2022 saw gross merchandise value down 4%, to $4.1 billion, while revenues inched up 3% to $2.3 billion, but profits dropped to $345 million and adjusted EBITDA declined to -$99 million with an adjusted EBITDA margin of -4.9%.
During 2021 and 2022, Farfecth’s gross profit margin was over 40%; by contrast, luxury brands in the fashion sector boast a profit margin of just under 70%, according to Capstone Partners. And EBITDA margin performance is in the 25% range, while Farfetch’s has been in negative territory.
“Farafetch has continuously been losing money before they even pay their debit and before they pay taxes,” Regal Point’s Marolia observed, and he added the most important “tell” on Farfetch’s balance sheet is its cash flows.
“It sounds overly simplistic, but you’ve got to follow the cash. Cash flows from operations prove whether it’s a ‘legit’ company with a good business model or not. Year in, year out, Farfetch has a negative cash flow from operations,” he said.
For example, in 2021, it reported a $476 million loss in cash flows from operating activities. That increased to a $847 million loss in 2022.
Marolia describes the company as engaged in “shenanigans” regarding its reporting. A case in point is the second quarter 2023 earnings report from August 17, when the company was unraveling.
“Our Q2 results show Farfetch is growing, becoming more efficient and executing on our key strategic priorities,” Neves said in the statement. “2023 is set up to be a great year for Farfetch, toward strong GMV growth, adjusted EBITDA profitability and positive free cash flow.”
Then a turn of the page shows gross profit margins were down from 46.2% in second quarter 2022 to 42.5% in 2023 and the company had a profit loss of $281 million, adjusted EBITDA down to -$31 million and adjusted EBITDA margin of -6.4%, off from -4.9% previous year. Cash flow losses from operating activities during the first six months ending June mounted from $329 million in 2022 to $406 million in 2023.
“There were a lot of red flags over the years, if you were reading the transcripts and studying the financial statements to put all the clues together,” Marolia said.
“I believe Neves started with a good idea and people got caught up in the sentiment. Any institution is made up of human beings, even high-frequency trading algorithms are designed by people. Getting emotional and excited by investing is a really good way to lose money,” he shared.
Uncharted Waters
In trying to enter the luxury market, Coupang is getting into uncharted waters and may quickly discover it is in way over its head. Its transactionally-oriented flagship business has little to no connection with the luxury market, where consumers don’t just buy products, but fulfill their dreams.
“Farfetch never was, and never ever will be, a luxury brand. Never,” shared Luxury Institute’s Milton Pedraza on Linkedin. The marketplace concept doesn’t appeal to high-net-worth customers – the lifeblood of any luxury brand – who want to be romanced in the store.
While some consumers are drawn to the convenience of online transactions, it’s not the chosen path to purchase for the truly affluent clientele on which luxury brands’ legacy businesses are built.
The luxury marketplace concept “is a business model that ultimately will never be profitable, burns a lot of cash and doesn’t bring in the right luxury consumers,” Pedraza concluded.
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