The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
LONDON, United Kingdom — In a brick-walled basement in Hackney, amidst rails hung with Balenciaga and clusters of technology developers, "The Store of the Future" was almost ready. Here, billion-dollar fashion "unicorn" Farfetch has been staging a test run of the tech-powered retail experience the company is set to unveil later today at the debut FarfetchOS conference at London's new Design Museum in a move that further extends the platform into physical stores.
The announcement comes at a critical time for Farfetch, which is reportedly preparing for an IPO. The company, which connects consumers with a curated network of boutiques and brands, is now the world’s top luxury e-commerce destination measured by traffic, outperforming competitors including Yoox Net-a Porter and Neiman Marcus, according to data from web analytics service Alexa. And though Farfetch is not yet profitable (market reports suggest it lost around $40 million last year), it surpassed gross sales of $800 million in 2016, up 60 percent from 2015, with estimated annual revenues in the region of $150 million. (Farfetch is said to take a 25 percent commission on net revenues from partners.)
But Store of the Future could prove to be one of the company’s most important moves yet. While luxury e-commerce is growing fast, the portion of personal luxury goods purchases that happen online — now about 7 percent of total — is expected to plateau at about 20 percent by 2025. This means that, for the foreseeable future, the vast majority of sales will still take place in physical stores, which have yet to really benefit from the digital revolution.
From fitting rooms equipped with photo booths to mannequins with screens on their foreheads, most in-store technology has been gimmicky stuff that’s more likely to drive short-term PR than actual sales. By contrast, Farfetch’s Store of the Future aims to dramatically improve retail productivity by capturing invaluable customer data and enhancing human interactions between shoppers and sales associates.
The concept is also modular, meaning brand and boutique partners can pick and choose the components that make most sense for their businesses. And while Farfetch has developed the core operating system on which Store of the Future runs, the initiative is conceived as a platform, meaning the majority of innovation will ultimately come from third-parties, who build new services on top of it.
It's a bit like an operating system for a shop — you build the apps.
For the time being, Farfetch has developed a few key applications to demonstrate the power of the platform: a universal login that recognises a customer as she checks into the store; an RFID-enabled clothing rack that detects which products she is browsing and auto-populates her wishlist; a digital mirror that allows her to view her wishlist and summon items in different sizes and colours; a mobile payment experience similar to what exists in Apple Stores; and, of course, the underlying data layer that connects these services with each other and the Farfetch platform.
Store of the Future is still in beta. But the concept will launch this autumn with London-based boutique Browns, which Farfetch acquired in 2015, and Thom Browne, which will join the Farfetch platform and deploy the technology in its New York flagship. A full commercial roll out is planned for 2018, although the business model has yet to be tightly defined.
Ahead of its official unveiling, BoF sat down with Farfetch founder and CEO José Neves to learn more about the vision and business logic behind Store of the Future — and get an exclusive sneak peek of the experience.
BoF: Why did you decide to launch Store of the Future?
JN: We started roughly two years ago and we were really thinking about: five years out, 10 years out, how are people going to shop for fashion? Today, over 90 percent of transactions take place in brick-and-mortar stores. By 2025, it will be around 80 percent, which is still eight out of 10 sales. Although digital is already influencing most consumption behaviour — and that’s where the eyeballs are; it’s the new TV, it’s the new print, it’s the new everything — when it comes to actually purchasing fashion, there will be a plateau in online sales. Fashion is not downloadable, which makes it very different from movies or music.
So, three key facts: number one, digital is completely influencing consumer behaviour and the creation of desire; number two, online is growing much faster than offline; but three, offline is still — and will be — where the vast majority of transactions take place. So how do you make sense of all of this?
A rendering of Store of the Future’s digital mirror | Source: Courtesy Farfetch
It’s really about creating the luxury experience of the future. We’ve been omnichannel from day one. From the very start, we essentially connected physical inventory to a digital platform. The first step is a single view of inventory. Then we launched more omnichannel propositions, like same-day delivery in 10 cities, click and collect in store. The Store of the Future is the next step, using the physical store as a service point. It’s post-omnichannel, or what we call “augmented retail.”
The physical store is going to survive and is going to remain the centre-stage of shopping, but it’s not going to be a physical store as it exists today. The disconnected store — as opposed to the connected store — won’t be around. Period. And the biggest evidence of this is actually Farfetch itself, because once we connect a boutique to the platform, we account for about 45 percent of sales. We’re like OpenTable for boutiques — they know every empty table, we know every shoe that is sitting on every shelf unsold. We know how much offline is moving and how much online is moving. And just by making your physical inventory available 24-7 to a global audience, you massively boost your economics.
BoF: So what exactly are you unveiling?
JN: The store of the future’s built on three principles. The first is human touch. If you go into a store today, the sales staff are doing things machines should do: they’re checking if they have your pair of shoes in the backroom; or they’re asking your name and looking you up in the database. Is this empowering human touch? Not at all. The store of the future is fundamentally about releasing customers and shop assistants to focus on the human side of the interaction. It’s about empowering the staff in the shops to stop being inventory controllers and start being in-store influencers. Right now, they are inventory controllers.
The second principle is being modular. We absolutely do not believe there is one store of the future. There will be 1,000 stores of the future. Think about the way a brand commissions an interior designer and differentiates the space, the smell, the experience, the merchandising. What we do not want is cookie-cutter experiences. So some components will be suitable for some brands and not for others.
And the third is open architecture. We don’t want to come up with all the innovation ourselves. The idea is to create a “Store of the Future” platform and then invite start-ups and brands themselves to come and build on top of it.
BoF: Are there core applications that you are developing yourself?
So, the core data layer is ours. That’s the glue that glues all the bits together. All these systems should talk to each other. That is one of the big problems that you see with in-store technology today. It’s all disconnected. The digital mirror doesn’t talk to the checkout, which doesn’t talk to the website. For example, take our digital mirror. The hardware itself was built by another company, but we built the software which pulls right from our database, so if you are shopping with a brand like Thom Browne [a client of Farfetch’s white-label e-commerce solution Black & White] and you have something in your wish list on the Thom Browne website, it will be on your wish list on the mirror in the store.
We absolutely do not believe there is one store of the future. There will be 1,000 stores of the future.
Data is the common denominator. What’s built on top of this can be built by Farfetch, by a cool startup or by a brand. We are working with RFID companies, we’re working with hologram companies. It’s not like we’re going to build all this stuff ourselves. It’s a bit like an operating system for a shop — you build the apps.
One essential component is what we call the “Shop Floor” app. That’s the app that shop assistants will have. With this one, we will tend to do everything in-house, because it’s what handles all the data from all the various points.
BoF: And what about on the customer side of the equation?
JN: On the customer side, we have the Farfetch app, which works with Store of the Future. But in the future, we will also create white-label apps for brands or just provide the API, so they can integrate this into their own apps themselves.
BoF: Of course, when Apple launched the iPhone, it was hard for anyone to imagine all the apps that people would build on the iOS platform. But what are the kinds of things that you think people might build on top of this?
JN: To your point, it’s very hard to imagine. Who knew Shazam was going to let you recognise music on the spot and direct you to the iTunes Store, or that you’d have dating apps… What we are demonstrating is a few use cases, which for us are quite simple yet very powerful. Being recognised as you come into the store, which is either via Beacons or via a wallet like your Apple Wallet, scanning in like you would with a boarding pass for a flight. Then, there’s what we call the “offline cookie,” which is a technology that automatically adds products to your wish list on your app as you touch it in the store, without having to scan anything.
BoF: How does it work?
JN: It’s basically RFID and your phone’s radio frequency. It detects you as the person closest to a piece and that the piece has moved. And so just by moving it from the rail, you’re adding to your wish list. Then there is the fitting room experience of the pieces you liked. Want to try them on in 5 minutes? They’re there. Using the mirror, you can also request different colours, different sizes. You come out with the pieces you want. Then there’s the payment part, which is completely mobile in the middle of the shopping floor, so you don’t need to do it by the till. And by using your app to pay, you also connect with the assistant in the shop, which whom you can enter into dialogue and keep in touch. These days, it’s very common you go into a store and connect on WhatsApp. Connecting with customers has become a major tool for shop assistants, but it’s still a bit quirky and they ask you fill out bits of paper. Here, that becomes automatic.
A rendering of Store of the Future’s interactive rail | Source: Courtesy Farfetch
It’s all a very millennial-style negotiation: I’ll give you my data if you give me something in return. That’s what we do every time we open Instagram, every time we open Facebook. We know those guys are gathering all this data, but the exchange makes sense. Data is currency and I expect something back. This needs to be absolute practice for the “Store of the Future.” But once you get a consumer to [share her data], it’s gold dust… You’ve asked permission from the customer to drop a cookie. It’s a brick-and-mortar cookie. And you will be able to know everything: how long the consumer was in the store, which products were picked up, what did she try, what were the sizes that fit and the sizes that didn’t fit, what are her preferred payment methods, does she have it delivered to her house, her hotel… and that cookie will be linked to the online cookie as well. So then you have a real single view of a customer.
What you can do with that data is offer a super-personalised experience, both online and offline, it also makes your company much more efficient. Take marketing; imagine targeting a customer on Instagram because you know that five hours earlier they’ve been to your shop and they’ve picked up a certain bag. And let’s remember, this is currently where 90 percent of the action is happening.
BoF: How are you charging for all this?
JN: The commercial model is not defined yet. The philosophy of Farfetch has always been win-win. Our platform is a pure revenue share model. There’s no minimums, no set-up fee. Black & White is mostly a revenue share model as well. Store of the Future obviously involves physical hardware, which involves set-up costs and stuff like that. But we will never be a hardware company; we will never be a software licensing business. We’re in the business of revolutionising retail and being a positive force for the industry. If we do that, there will be money to be made for everyone. And then how we split it needs to be win-win for both sides.
Expectations? Store of the Future has been in development for roughly two years, during which Farfetch has revealed few specifics about its plans. Yet the fashion "unicorn" (which, last May, closed a $110 million Series F round, valuing the company at around $1.5 billion) is very well capitalised and has dedicated significant resources to developing Store of the Future, hiring managing director Sandrine Deveaux, previously multichannel director of Harvey Nichols, to lead a unit dedicated to the strategy and acquiring London boutique Browns, at least in part, to function as a sort of petri dish for in-store innovation. With this level of commitment, it's fair to say expectations were high.
First impressions? In-store technology can often feel gimmicky, cheap and out of sync with luxury-level retail. What was most immediately striking about Farfetch's Store of the Future demonstration was the simplicity and elegance of the customer experience. The digital mirror, in particular, had the kind of high-touch gloss that would integrate seamlessly into a luxury flagship.
Most potential? The value of what Farfetch calls its "offline cookie" is extraordinary. But perhaps most promising is the open architecture that the company has embraced, inviting third-parties to build applications on top of its Store of the Future platform. The approach allows the company to tap a much wider range of ideas and expertise than it could effectively develop in-house. It also helps reduce the risks and costs of innovation. When Apple launched its iPhone App Store back in 2008, it was impossible to predict the universe of apps people would develop on top of the iOS platform. But the App Store gave birth to an explosion of innovation far greater than anything Apple could have achieved alone and, today, consumers use iOS apps to order taxis (Uber), listen to music (Spotify), share moments (Instagram) and shop (Amazon). To get this right, however, Farfetch will need to attract and nurture an ecosystem of partners — and make sure incentives are aligned. Like Apple, it will also need to strike the right balance between openness and control, enabling innovation while ensuring a seamless and high-quality experience.
What's missing? Today's consumers are used to sharing their personal data in exchange for services like Facebook and Instagram. But the transaction must deliver value on both sides. There's little doubt the data gathered by Store of the Future is incredibly powerful for brands and retailers. But does it offer enough value for the consumer? Of course, it remains to be seen what types of apps will be built, but a loyalty programme that gave consumers additional incentives to engage with Store of the Future in its first instance could certainly help to drive higher engagement. It could also get more people to download the Farfetch app.
This interview has been edited and condensed.