LONDON, United Kingdom — The senior leadership team of Farfetch sat in a circle on the second floor of a building overlooking London’s Clerkenwell Green. Moments ago, they had concluded a two-day meeting, held offsite, to set the company’s strategy for the future. In less than an hour, news would break to the world outside that Farfetch had raised an $86 million Series E round, led by Yuri Milner’s DST Global, in a deal that valued the company at a staggering $1 billion, making Farfetch one of the few 'unicorns' to emerge in fashion and join the ranks of private companies worth $1 billion or more.
Once near mythical, 'unicorns' have grown in number in the last few years, especially in Silicon Valley, as start-ups from Uber to Airbnb have crossed the $1 billion threshold. Yet, in fashion, the phenomenon remains rare. Asos was never worth $1 billion as a private company. Neither was Yoox. Net-a-Porter, valued at £350 million (about $531 million) when it was acquired by Richemont in 2010, is certainly worth more than $1 billion today, but there has been no market transaction to validate this.
“Everyone is excited. Not many companies achieve this valuation,” said José Neves, founder and CEO of Farfetch, just before the public announcement, stressing that the company, a curated fashion platform which connects consumers with carefully selected products from a large network of independent boutiques, was valued based on established benchmarks of public companies employing online marketplace models. “This is not a social media valuation, where a company can be worth billions with zero revenue.”
Farfetch declined to disclose revenue figures, but according to market sources, gross merchandise volume reached more than $350 million last year, putting estimated revenues in the ballpark of $87 million (the business is said to take a 25 percent commission from its partners). The company is not profitable.
Given its current valuation, a future acquisition seems unlikely and the company will probably be aiming to IPO in the coming years. But Neves is keeping his options open. “We don't have a time frame for an IPO. There’s so much work to do that will keep us busy before an IPO comes.”
Farfetch plans to use the latest injection of funding to drive international expansion. This year, the company will launch new local language sites in German, Korean and Spanish. On the supply side of the business, Farfetch is adding boutiques — as well as brands — in Japan and Australia. “We’re expanding to territories where there are brands that are in high demand globally, but not widely available in the West. The idea is to use Farfetch for the first time as a global platform for local designers to attract global audiences.”
I didnt want to be another retailer with a traditional model. I wanted to do what no-one had done.
While Asos, Yoox and Net-a-Porter found success by replicating a traditional wholesale model online, Farfetch has taken a fundamentally different approach, rooted in platform thinking and the connective tissue of the web. “I didn't want to be another retailer with a traditional model. I wanted to do what no-one had done,” explained Neves.
Like most pre-Internet business models, the traditional wholesale model is a linear process. Firms buy merchandise, which they push out and sell to customers. Value flows in one direction much like water through a pipe. Net-a-Porter is a pipe. So is Yoox. These businesses take on significant inventory risk and have high working capital requirements. Farfetch, on the other hand, doesn’t simply buy and push out merchandise. Rather, it provides a platform for certain users (boutiques and brands) to display and manage items for others users (shoppers) to consume with zero inventory risk for Farfetch.
Also at the heart of the company’s vision is what retail strategists call ‘omnichannel,’ the integration of online and offline commerce. While Asos, Yoox and Net-a-Porter are ‘pure play’ e-tailers without physical stores, Neves thinks bricks-and-mortar shopping is here to stay. "Fashion needs to be touched, tried on... That thrill of walking into a boutique or a department store I think will continue to resonate with the vast majority of consumers,” he said. “Physical stores are not going away. They are a core part of the retail experience. But the old model, where you define digital and physical as being separate, that’s going away. E-commerce and traditional retail are merging. It's called omnichannel. But I don't like the term. Internally, we simply call it the new retail.”
“We fundamentally do not believe in making a specific order for the online channel, sending it off to a remote warehouse in the middle of nowhere and shipping it from there to the world,” added Neves. “That is the old e-commerce model. We believe that's finished. It's not the model of the future. The model of the future is distributed stock. The new inventory is made up of dozens — hundreds, in our case — of micro-warehouses.” Indeed, for Farfetch, the warehouse is everywhere, distributed across its global network of stores.
This has enabled the company to deploy services like ‘click and collect,’ which allows customers to buy items from any Farfetch boutique and pick them up, try them on and return them over the counter at any store in the network. Using the same backbone, Farfetch is also planning to deploy same-day delivery across multiple cities. “We want to do this in New York, LA, Milan, Paris, London. No-one does it yet in five cities. The maximum is two or three. That’s because the old e-tail model depends on where your warehouse is situated. If your warehouse is in London, you can service London. If it's in LA, forget it. With this new omnichannel model, it doesn't matter.” To make this work, Farfetch has contracts with local courier companies, as well as DHL and UPS.
As online and offline commerce continue to merge, physical stores are becoming increasingly wired. “Stores are going to be completely different from what they are today,” predicted Neves.
“From day one, we were in stores with software that synchronised inventory and allowed us to manage online orders. But how do you extend that? Multi-channel CRM, point of sale, in-store analytics, payments.... Then there's some gimmick-y stuff, which I'm not a big fan of, but maybe one day we'll make it work, like digital mirrors and stuff like that. We want to be the integrator of all this technology and we will create demonstration stores with our partners to really test and develop this integration. We see this as beneficial for us, because by doing this we are even more seamlessly integrated with boutiques and mono-brand stores. We want to become the world’s omnichannel platform.”
It’s a bold vision and executing towards it has required Neves to build a team that’s equally rooted in fashion and technology. “It's the secret sauce of the business. If you look at our team, everyone comes either from a fashion background or a tech background. It's balancing the left-brains with the right-brains,” he explained. “I think maybe in a more usual retail environment there would be a tech team and a brand team. Here it's just one seamless team.”
Major fashion incumbents, like LVMH or Kering, which each own big stables of luxury brands, have largely failed to innovate at the scale of Farfetch. “I think there’s a DNA factor. These companies are built on craftsmanship and the creative side of things,” said Neves. “I always say that if e-commerce is one percent of a business, it will be one percent of the brain space of your CEO. So the digital guy sitting there in the corner? ‘You’re worth one percent, we'll deal with you later.’ It's a vicious circle. Because it's small, digital doesn't get the care and the patience it needs. So it remains small.”
“We have a hundred engineers. We will have 200 by the end of this year. It's a huge investment. No brand can convince the CEO to hire 200 engineers. If you're on the $1 billion mark, you can do it, but it takes commitment and many of these companies are publicly traded. How will the market react when they say they will have two quarters of negative results because they plan to invest heavily online?”
Then, there’s Harvard Business School professor Clayton Christensen’s “Innovator’s Dilemma,” which states that large and successful companies often fail to adopt new technologies or business models that can give them an edge in the future because they have too much to gain from the present. “Sometimes I hear brands say, ‘It's working well for us. We're profitable. We're still growing. Why should we change?’”
A version of this article first appeared in a special print edition of The Business of Fashion, which highlights ‘7 Issues Facing Fashion Now,’ from sustainability and the human cost of manufacturing clothing to untapped business opportunities in technology, Africa and the plus-size market. Join the discussion on BoF Voices, a new platform where the global fashion community can come together to express and exchange ideas and opinions on the most important topics facing fashion today.