The rise of e-commerce at the high end of the luxury goods sector is a theme we’ve returned to on a number of occasions, noting that while there is still resistance to using a ‘commodity’ route to market in some quarters, there’s also a growing push among other retailers to bite the bullet.
One of the bigger success stories to date has been luxury marketplace Farfetch, which this month has beefed up its prospects with a couple of significant transactions. The first pertains to the all-important China market; the second is a high-profile deal with that most luxurious of luxury retail outlets, Harrods.
Of the two, the Chinese gambit possibly has the longer term importance as Farfetch ties-up with the country’s JD.com marketplace to take on rival Alibaba at the luxury end of the market. JD.com has been servicing this consumer demographic via its Toplife arm, which was set up in 2017 and will be rolled into Farfetch as a result of the new alliance. JD.com's 300 million customers will now use its app to access in excess of 3000 brands via Farfetch’s network.
Farfetch and JD.com were already partnering in logistics, technology and marketing, but this closer relationship will strengthen the former’s foothold in the world’s fastest-growing market for luxury goods and services. Farfetch founder and CEO José Neves says:
By combining this Level 1 Access on JD, with the capabilities of CuriosityChina, we now offer luxury brands a one stop solution for developing a digital strategy for China, creating the premier luxury gateway to China.
China represents a paradox for today's luxury players. It is the fastest growing part of the market, but by far the hardest to crack. For any luxury brand there is one single most important strategic priority, to win the Chinese millennial consumer. And these can no longer be done by a physical store network, but rather by mastery of the Chinese digital channels.
What the JD.com alliance does, he adds, is provide luxury retail brands to open up or expand a Chinese revenue stream via the Farfetch platform and the associated infrastructure investment that has taken place:
We now have a data center in Shanghai to handle 100% of our China traffic, which enables us to provide a much faster experience while also localizing the app and size to tailor the look and feel to the preferences of the Chinese luxury consumer. This data center exists behind the China firewall, but it's still linked via a software-defined Wide Area Network with our other data centers, which was a major technical achievement, and we have already begun to see this investment drive improved conversion.
Like most SaaS e-Commerce packages, we offer an end-to-end solution for China, including cross border logistics, localized payments and an integrated global tech architecture which we believe will continue to be a competitive advantage of our enterprise offering in an industry, where most growth is coming from the Chinese consumer.
And that target demographic is open for business, insists Neves, if you put in the spade work upfront:
What you've seen from the luxury industry is you've [got] mixed reports, with some brands delivering great growth and great traction in that market and others facing a little bit of headwinds. I think if you have a strong product proposition, in our case also with strong localization…once you have those things in place, the market is there and we're absolutely only scratching the surface.
Farfetch has done the work, he adds:
We already have a very efficient cross border solution, which includes custom clearance and has a lead time of three to five days consistently across the China territory. We also have a domestic fulfilment solution which is fulfilment by Farfetch Shanghai that uses JD Luxury Logistics as our partner.
We have a full infrastructure localized in China from data centers, engineers, local app et cetera. And we've acquired CuriosityChina , which had specialists, and we're powering mini programs for 80 luxury brands, including obviously the Farfetch Mini program.
So if you look at these, there is a complete solution and with the integration of the Farfetch button on the JD apps in the coming months, it will be completed. And from that point onwards, it's completely unique. There's no other Western or Chinese companies that can offer the full 360 exposure to the Chinese market by all channels.
There's a competing proposition from Alibaba. But in our case we're talking about the single integration both cross border and domestic, direct-to-consumer with support for white label services, especially on WeChat, and this is very, very powerful. We think it's going to be very compelling for brands and for our consumers.
Away from China, Harrods, the luxury department store in London’s exclusive Knightsbridge district, has selected Farfetch as its exclusive technology partner to overhaul and push its global e-commerce platform.
Harrods will continue to operate and manage trading on the site, including marketing, brand relationship and product strategy, all creative and editorial content, and customer services, but underpinning everything will be the Farfetch Black & White white-label platform with Farfetch assisting on e-commerce management, operations support, international logistics support, and technical support.
It's a big deal for both parties. Analyst Alizah Asif Farooqi of Gartner L2 notes:
Despite being a longstanding pillar of brick-and-mortar luxury, Harrods lacks omni-channel features, including Buy Online, Pick Up in Store and inventory counts for items. As such, the department store fell from Average to Challenged year over year in Gartner L2’s rankings, seeing declining web advertising and mobile site performance relative to other brands tracked in Gartner L2’s Digital IQ Index: Department Stores. Joining forces with Farfetch could be a particularly plush digital opportunity because Harrods is pairing up with the e-tailer’s Black & White Solutions, which offers global e-commerce while still allowing the former to exercise creative control.
Harrods is a powerful reference for Farfetch to pick up, joining Chanel, LVMH Louis Vuitton, Ralph Lauren, Coach, Montclair and Hugo Boss among others. In total, Farfetch now underpins the e-commerce operations for 17 luxury brands and capacity to more. Neves says:
I think we have an extraordinary proposition for the department stores. We were a platform for the best curators and creators of luxury and department stores. Obviously [these] are great retailers and these institutions, usually very iconic, have a very strong domestic brand awareness. However, their business is usually very domestic-focused. What Farfetch does is in fact amplifying their brand and their incredible offerings to currently 1.4 million customers in all corners of the world with key geographies such as China, the Middle East, Latin America etc.
We've been having great conversations with the pipeline of department stores. Obviously these are million billion dollar businesses. So it's a relatively slower sale cycle to boutiques, but we're definitely very happy with the progress. We think the proposition is very strong. We're having very good results with the ones already on the platform and we expect to continue to have department stores as a key area of our supply.
To strengthen that proposition, investment continues in the underlying platform. The coming months will see a move to harmonize the B2B enterprise offerings under the unified banner of Farfetch Platform Solutions (FPS). This will include Black & White, Store of the Future and CuriosityChina under one enterprise-focused label.
There remains a vast opportunity in the luxury retail market, argues Neves:
Luxury still has very low online penetration, 10% as of the end of 2018. We believe we are uniquely positioned to take the lion's share of the online portion of an industry that we believe over the next decade will grow to be worth more than $500 billion.
Over the next 10 years, online penetration of the $500 billion industry is expected to grow from 10% to 25%. This means we have the opportunity to go after an incremental $100 billion of sales in the online luxury market. And we have the arsenal to go after this huge opportunity.
Farfetch is a genuine retail success story - and these two developments, coming on top of last year’s successful IPO, will do nothing to dampen expectations about future prospects. The China deal is particularly interesting with the JD.com alliance enabling the firm to provide genuine competition to Alibaba in the most lucrative luxury retail market in the world. And adding Harrods to the already impressive roster of retail customers is eye-catching.
When a globally-recognized brand like that turns to a third party to deliver its e-commerce ambitions, the pressure will only continue to mount on those luxury laggards who still cling to the delusion that theirs are the products too good to be sold via a browser. Or as Gartner L2's Farooqi puts it:
For department store brands trying to stay ahead of the crowd, pairing up with an international platform such as Farfetch could be the answer.