SHANGHAI, China — In China’s highly competitive and hugely lucrative e-commerce market, tech giant Alibaba and luxury titan Richemont have historically been pitted against Farfetch, a far smaller company with major backing from Alibaba arch-rivals JD.com and Tencent.
Last week Alibaba and Richemont announced plans to pour around $1 billion into the e-commerce marketplace and establish a new China-focused joint venture.
The tie-up represents a major shakeup in China’s e-commerce ecosystem and an unlikely realignment in luxury alliances. Farfetch has long been linked to Alibaba’s chief e-commerce competitors, Tencent and JD.com (also one of the company’s largest shareholders). Meanwhile, Richemont owns Farfetch rival Yoox Net-a-Porter, which runs its China business via a joint venture between Richemont and Alibaba.
The deal illustrates how the pandemic is redrawing the luxury landscape and reinforcing China’s importance as the world’s largest market for both e-commerce and luxury.
"This agreement is very meaningful for the luxury e-commerce landscape as you are basically moving from a very fragmented approach to one where an undisputed leader has emerged," said Erwan Rambourg, author of Future Luxe: What's Ahead for the Business of Luxury.
Even before the global health crisis, Chinese consumers represented 35 percent of luxury spending, but much of their shopping took place abroad. With the collapse of international travel this year, that demand is shifting to the mainland and creating a fresh imperative for luxury brands to tap into the market. Farfetch pegs the value of that market at $70 billion, a hugely lucrative prize.
The deal illustrates how the pandemic is redrawing the luxury landscape.
“We believe that digital channels will take the lion's share of this $70 billion latent demand, given how vast China is and how underdeveloped the physical store networks are in China for most luxury brands,” said Farfetch Chief Executive José Neves.
There’s also huge potential for further growth. At present, just 3 percent of luxury fashion sales in China take place online, Mike Hu Alibaba Group vice president and general manager of its Tmall for Luxury, Fashion and Fast Moving Consumer Goods, told a Shanghai event in September. But that could hit 15 percent within a few years, he said.
For luxury brands, growth will likely be driven by young consumers in China’s lower-tier cities, where it’s unusual to find a Louis Vuitton or Gucci flagship at the local mall. Over 50 percent of luxury consumers in China live in cities that are second-tier or lower, but they have limited access to luxury western brands’ store networks, according to a report by the Boston Consulting Group and Tencent.
“As we always say in the industry, whoever owns the young generation in luxury owns the future,” Judy Liu, Fafetch’s managing director for Greater China, told analysts last week.
However, it hasn’t been easy for luxury brands or international multi-brand retail platforms to make e-commerce work in China in spite of the clear opportunity. The landscape is dominated by Alibaba and JD.com and crowded by smaller competitors, leaving luxury brands unable to attract Chinese netizens to standalone e-commerce sites. On the other hand, luxury has long been wary of joining forces with China’s tech giants. Their e-commerce platforms were thought to be a poor partner for luxury, in part because they sold such mass market merchandise, but also because of the prevalence of fakes.
In 2017, as Alibaba and JD.com both pivoted to luxury by launching specific luxury flagship store avenues for brands, this attitude started to change, but it wasn’t until the pandemic forced stores across China to close that a critical mass of luxury brands decided to join forces with one or more of China’s major platforms.
If there is one company that can really scale up Farfetch in China, it’s Alibaba.
Still, so far partnership efforts have had muted success. Richemont and Alibaba’s joint venture focused on Net-a-Porter launched almost exactly a year ago on Alibaba’s core luxury platform Tmall Luxury Pavilion. It brought with it 130 brands that sell through its shop-in-shop flagship, but neither company have provided details on its performance.
Meanwhile, Farfetch said its 18-month-old storefront on JD.com “did not ramp up as we expected.” The venture will close as part of its new partnership with Richemont and Alibaba. Instead, Farfetch will open shops on Tmall Luxury Pavilion, its luxury outlet platform Luxury Soho and its cross-border marketplace Tmall Global.
Under the terms of the new deal, Alibaba and Richemont have invested $300 million each directly in Farfetch, plus $250 million each in a new joint venture, Farfetch China. They’ll own a combined 25 percent stake in the unit, with the option to acquire another 24 percent. The deal nets Farfetch the support of China’s most powerful e-commerce player, with 751 million active consumers.
“If there is one company that can really scale up Farfetch in China, it’s Alibaba,” said Patrice Nordey, a Shanghai-based managing partner at digital agency Fabernovel. "Have JD.com and Tencent helped Farfetch explode in China? Not that much. They have nice growth, but they haven’t exploded. It’s kind of normal, strategically, for Farfetch to look in the other direction to see if Alibaba can do better,” he said.
For Alibaba, backing Farfetch is another bet on luxury e-commerce. The tech giant has ambitions to capitalise on the opportunity to entice more luxury brands to its e-commerce platforms during the pandemic. One of Tmall’s aims for the coming year is to attract significantly more independent and niche brands to its platforms, Tmall’s Hu said in a recent interview. This job will be made much easier via a Farfetch storefront on the Luxury Pavilion, as Farfetch have already done the legwork in recruiting thousands of these brands.
It remains unclear how Alibaba and Richemont will balance their joint ventures with direct competitors Farfetch and YNAP. To be sure, their business models differ: YNAP operates a majority wholesale business known for its brand and curation, while Farfetch operates a marketplace model that connects luxury brands, boutiques and customers, and offers a wider product selection.
"Farfetch and YNAP will continue to have a separate approach and also carry different brands so both will hopefully get a boost from the set up and the incremental investments, with FarFetch also offering advice and tech solutions as a key complimentary service," Rambourg explained.
Richemont Chairman Johann Rupert said he was attracted by Farfetch’s strength in technology, but remains committed to YNAP.
The deal also ratchets up the pressure on JD.com, underlining Alibaba’s dominance in China’s e-commerce sphere. But the platform remains in the game, and Farfetch wasn’t the real centrepiece of its luxury strategy.
The deal also ratchets up the pressure on JD.com.
Like Tmall, JD.com has signed numerous new luxury fashion names to open flagships on its platform in the wake of China’s initial coronavirus outbreak. It now boasts names as diverse as Delvaux, By Far and A-Cold-Wall. The company also benefits from its market position selling expensive branded products (mainly electronics and household appliances) to a large swath of China’s lower tier cities, a market position that may make it more attractive to luxury brands.
“Luxury has been growing very, very strongly this year for us,” President of International Business at JD Fashion, Kevin Jiang, recently told BoF.
What Tencent’s next move in relation to Farfetch will be is unclear. Earlier this year, the internet giant added another $125 million investment to Farfetch coffers, along with another $125 million from San Francisco-based Dragoneer Investment Group, with the express purpose of accelerating the platform’s growth in China.
Farfetch said it will retain its relationships with Tencent via its presence on WeChat, where it works with 90 luxury brands via its subsidiary, the marketing firm Curiosity China. Neves said the platform remains key to building brand awareness in China.
Exactly how the deal will play out remains to be seen, but it reframes one of the most important landscapes in luxury and signals wider ambitions for the parties involved.
“Our mission is to be the global platform for the luxury industry,” Neves told analysts on Friday. The deal is “a global partnership, which extends beyond China.”