The luxury IPO that could take the high end retail e-commerce story to the next stage

We’ve taken several looks at the luxury end of the retail sector and the reluctance by some of its big names to engage with e-commerce. While there are exceptions, many retailers with high end brands cling on to the notion that selling online to a mass market undermines the exclusivity on which their traditional business models are built.

That said, the luxury e-commerce market is one that is shaping up to be big business. According to research from Bain, the global market for personal luxury goods was worth around $307 billion in 2017 and is expected to reach $446 billion by 2025.

That’s backed up by a recent report from Luxury Daily and Unity Marketing - State of Luxury 2018: The Insider View. Based on a study of 599 decision-making “luxury industry insiders”, the report finds that that 68% of luxury goods brands now sell goods over the Internet to some degree or another, up from 62% in 2016.

Pamela Danziger, President of Unity Marketing and lead researcher in the study, states:

The search is on for the next generation of luxury consumers and, increasingly, luxury brands realize that they must troll the Internet to find them...The insiders surveyed believe they have strategies in place to respond to the shifts in the market that will enable them to overcome the headwinds they faced over the last few years.

It’s against that backdrop that London-based online luxury marketplace Farfetch has now confirmed long-standing speculation that it will head for a public listing on the New York Stock Exchange, a move which CEO and founder Jose Neves said at this time last year was the next logical step for the firm.

Founded by Neves in 2007, Farfetch was set up to provide an online platform for small businesses. Today it can boast 500 independent luxury boutiques and 200 brands, including the likes of Chanel, Gucci and Balenciaga. Backed by the Chinese e-commerce giant JD.com, Farfetch has almost a million active consumers and can ship to 190 countries

It’s been active in striking lucrative partnerships, such as distribution deals with Burberry and London department store Harvey Nichols and its deal with publisher Conde Nast to integrate its content with Farfetch's platform.

It’s also the owner of bricks-and-mortar store Browns in London which it uses as a testing ground for new retail technology, such as touch-screen-enhanced mirrors and connected clothing racks, in what it calls the "store of the future." Farfetch also offers Black and White, an infrastructure platform that luxury brands can use to develop their own e-commerce operations if they don’t want to be part of a public marketplace.

Farfetch can also stake the claim to be one of the few European tech firms with a valuation north of $1 billion. In the IPO filing with the US Securities and Exchange Commission, the firm makes great play of its identification as a technology company rather than as a retail firm:

We are a technology company at our core and have created a purpose-built platform for the luxury fashion industry. Our platform consists of three main components: applications, services and data...Farfetch is the leading technology platform for the global luxury fashion industry. We operate the only truly global luxury digital marketplace at scale, seamlessly connecting brands, retailers and consumers. We are redefining how fashion is bought and sold through technology, data and innovation.

Goldman Sachs, JP Morgan, Allen & Co, UBS, Credit Suisse, Deutsche Bank, Wells Fargo, Cowen and BNP Paribas are underwriting the flotation and while Farfetch has not specified how much it expects, estimates from market watchers range from around $1 billion through to a perhaps farfetched (sorry!) $8 billion+.

All good?

So, is this a case of right time, right sector? Certainly the analytics around the online luxury market bode well for an IPO at this point. But it’s not all good news. As noted above, Farfetch reckons to have around 1 million active consumers as of the end of 2017 with a growth rate of 43.6%. Those are nice numbers, but the year-on-year growth in customers is slowing, down from 56.8% between 2015-2016. Of course, this is a customer demographic with deep pockets, so there is, presumably, a finite number, so slowing down is inevitable?

Sales growth is on fire - up 59% last year to $386 million - but the company has yet to turn a post-tax profit in its ten years in business. For the first half of 2018, Farfetch turned in a loss of $68 million, up from $29 million a year before. The positive reading here is that the company has been re-investing in its technology and platform as well as expanding its global footprint.

That footprint has one very big competitive asset - the JD.com stake, which that company is expected to retain post-IPO, gives it a headstart in the Chinese market and that’s one that’s currently of enormous interest to luxury brands. According to data from McKinsey, Chinese luxury shoppers account for more than 500 billion yuan ($100 billion) in annual spending and account for a third of the global luxury market.

Additional research from Bain contains the interesting nugget that it’s the Millennials - the retail sector’s Holy Grail - that’s particularly keen on spending. Bain suggests that a Chinese Millennial will buy an average of 8 ‘big ticket’ luxury items a year. Having JD.com on-side is hugely helpful at a time when the likes of LMVH and others are tentatively pushing into the China market with home-grown e-commerce offerings.

My take

Neves described this as the next logical step and from the outside that makes sense. The JD.com stake is a very attractive element of the IPO proposition, with only the as-yet uncertain impact of President Trump’s trade war with China as a rogue factor. But this looks like an important development in the evolution of high-end luxury brand e-commerce.