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Luxury goods firm Richemont is partnering with Alibaba with Farfetch. Thus the vision of a global platform for the entire luxury goods industry takes shape. Kering is also on the boat.
Richemont and Alibaba invest in luxury goods e-commerce company Farfetch.
E-commerce with luxury goods has been a flagship for a long time. On the one hand, in view of the expensive items, there was a lack of trust in the retailer, on the other hand customers were on average older and more reluctant to shop online than young people.
But internet business has been picking up speed for some time. This is driven by the strong internet affinity of the Chinese and the attractive e-commerce ecosystem of the Chinese internet giants, as well as the growing demand from the younger generation. And recently, of course, the crown pandemic, which is acting as a turbo for digitalization due to global store closings.
$ 1.15 billion for Farfetch
Swiss luxury goods group Richemont and its subsidiary Yoox Net-a-Porter (YNAP) have been at the forefront of the online luxury industry for years. Two other big players are Farfetch and Alibaba. And it is these three companies that announced on Thursday evening a global strategic partnership “to give luxury brands better access to the Chinese market and to accelerate the digitization of the global luxury industry”, as it is called in a joint statement.
Farfetch wants industry leadership
Alibaba and Richemont will invest a total of $ 1.1 billion in Farfetch. Farfetch’s business model differs from other online retailers in that the website functions as a pure virtual marketplace. While Net-A-Porter owns the products that are sold, Farfetch does not have its own inventory. Its expertise lies in delivering to customers in a few days the products of the luxury boutiques represented on the platform, which can be in stock anywhere in the world.
For company founder José Neves, the collaboration with Alibaba and Richemont is an important step towards his great goal of making Farfetch the most important global platform for the luxury goods industry.
Jose Neves registered at the London office.
Neves repeatedly stressed this statement to analysts on Friday and observers attest to him that he was a born seller. The 46-year-old sees his company not as a retailer, but as a technology company. Undoubtedly, both are in his blood: in the 1990s, the native Portuguese started a software company for fashion brands and also founded his own shoe company, for which he created the designs. Neves has opened a store in London’s Covent Garden neighborhood, one of the best locations for luxury retail.
However, Neves quickly became convinced that the future lies in the Internet. Ultimately, the crises helped him. He founded Farfetch in 2007, just before the global financial crisis. In the recession that followed, elite luxury goods shoppers first thought about buying expensive items online. Neve’s idea of spreading the range of small boutiques and labels around the world through a digital marketplace, regardless of opening hours, was very popular. In fiscal 2019, the company passed the $ 1 billion revenue mark.
Then came the crown crisis, for Farfetch it was a crown blessing. Shortly before, Asian clients had become almost as important as European clients to the London-based company. The company has been present in China since 2015. The Chinese clientele, in particular, loved buying luxury goods in physical stores and traveling abroad. The pandemic locks them up at home and has moved trading to the Internet. Between April and June, Farfetch sales grew by nearly 75%; more than 500,000 new customers flocked to the platform. Neves spoke of a paradigm shift in the luxury segment. The industry is now carrying out the structural change it had envisioned with Farfetch.
This confirmation must have gone well, because the previous months hadn’t been easy. Neves listed Farfetch on the New York Stock Exchange in 2018, but the price took a hit in mid-2019. After the surprise purchase of a fashion manufacturer, investors doubted the business model and raised the issue. if Farfetch wanted to be a luxury producer and not just an agent who collects commissions for using its market. So it helped that Chinese internet giant Tencent stepped in with capital aid earlier this year. Tencent joins the Chinese trading platform JD.com, which has been involved since 2017.
The Chinese believe in Farfetch, as Alibaba’s entry shows. It is unclear when Farfetch will break even. Operationally, the company stands out for its high costs. Despite likely significant sales growth, experts still forecast losses for the coming year. Investors, on the other hand, have gained new confidence and are not deterred by the complicated cooperation that Neves has now initiated. Since speculation about the deal surfaced this week, Farfetch shares have risen by around 50%. But Richemont’s investors are happy too: shares in the luxury goods company rose more than 9% on Friday.
Farfetch will now launch luxury shopping channels on the platforms of Alibaba, Tmall Luxury Pavilion and Luxury Soho, as well as Alibaba’s cross-border marketplace, Tmall Global. In the Tmall Luxury Pavilion, Farfetch becomes Net-a-Porter’s competitor, because the Richemont branch has also been active for over a year, albeit with a slightly different business model, as mentioned. Farfetch, on the other hand, will withdraw its virtual stores from JD, a competitor of Alibaba, although JD.com is also a large investor.
There is also Kering
The $ 1.1 billion that Richemont and Alibaba plan to invest are divided into $ 600 million ($ 300 million each), which will flow directly into Farfetch, and $ 500 million ($ 250 million each) for a new Chinese joint venture that will include the Farfetch’s market activity in the Chinese region. Control remains with Neves in both cases. Under the current agreements, Alibaba and Richemont also hold a maximum of 49% in the joint venture.
Artemis, the holding company of luxury goods group Kering (formerly PPR), which is investing an additional $ 50 million, will also expand its commitment to Farfetch. Kering’s boss, François-Henri Pinault, will also form a committee along with Johann Rupert, the head of Farfetch Neves and Alibaba, who is concerned with bringing the needs of the luxury goods industry even better into harmony with technological possibilities.
The investments of Alibaba and Richemont and the establishment of the joint venture are expected to be completed in the first half of the calendar year 2021, provided that the relevant closing conditions are met, as they say.
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