After a blockbuster 2020, in which Farfetch surged ahead of rivals, it’s time to look at the long-term potential of the fashion platform described by the size of its total addressable market and projected share of this market by the end of 2025.
To do this, we can start with Altagamma’s definition of the personal luxury goods market and its scale in 2019, then plug in a 6 percent annual growth rate over 6 years. This gives us a projected size for the total personal luxury goods market in 2025 of €400 billion.
This seems generous enough, as it assumes that the 22 percent plunge caused by Covid-19 in 2020 can be entirely recaptured over the period and implies that the personal luxury goods market could move back to the long-term growth trend of 6 percent per year, reported by Altagamma over the past 20 years.
Of course, Farfetch is a digital player primarily focused on fashion and leather goods. And we assume that by the end of 2025, digital sales will make up 30 percent of the personal luxury goods market, while fashion and leather goods will be worth about 51 percent.
But here’s where things become more complicated. How much inventory will soft luxury brands actually commit to multi-brand digital platforms like Farfetch? That depends.
How much inventory will brands commit to Farfetch?
Top-tier brands like Louis Vuitton, Dior, Chanel and Hermès are already 100-percent focused on direct-to-consumer distribution and will be unlikely to commit any material inventory to multi-brand digital platforms for the simple reason that any inventory commitment would effectively compete against their own distribution, reducing their e-commerce development and — even worse — diluting their retail space productivity. We know this would be a kiss of death, as sales per square foot is correlated with return on invested capital (ROIC), and ROIC trends are correlated with total shareholder return.
These top-tier brands could be interested in using multi-brand digital distributors as a customer recruiting tool. With this in mind, they could conceivably commit a small amount of inventory to these platforms, while demanding high visibility and full transparency on consumer data, the goal being to capture new recruits and shift them to direct channels in due course. To be sure, platforms like Farfetch may be tempted by the traffic generation potential of such deals, as well as the image enhancement they would bring, but we would likely see little advantage in their economics.
Top-tier brands have grown at a higher rate than the market average. Growth of 10 to 12 percent per year from 2019 to 2025 would make them worth €40 billion to €50 billion, or about 25 percent of the soft luxury market, by the end of the period. This is a slice of the market Farfetch won’t capture.
Second-tier brands such as Gucci, Prada, Moncler, Burberry, Valentino and Dolce & Gabbana, with about 80 percent direct-to-customer distribution may be more eager but have a “commitment ceiling.” To be sure, they have an interest in driving down wholesale (and grey market) exposure they tolerated prior to the digital revolution. Here, e-concessions à la Farfetch can help. And yet wholesale (and grey market) inventory spills over onto Farfetch, which first recruited multi-brand boutiques to the platform, putting brands into competition with their own wholesale customers, which often sell at a discount.
By committing directly to platforms (and cutting wholesale volumes), second-tier brands kill two birds with one stone: (1) they increase price execution discipline (as they align marketplace prices to their own brand.cn/com and directly operated store prices); (2) they materially improve their economics.
But second-tier brands would have to recapture less than 50 percent of their wholesale and grey market volumes through e-concessions to reach break-even point. And once second-tier brands have cut their wholesale and grey market exposure, they would be in the same situation as top-tier brands: any further inventory commitment to platforms like Farfetch would compete against their own direct-to-consumer distribution. We would expect, therefore, that at this point they would hit a “ceiling.”
By the end of 2025, second-tier brands could be worth as much as top-tier brands: €50 billion. Non-DTC sales are likely to make up about 20 percent of this. With online representing 30 percent of the market by then, Farfetch’s total addressable market with second-tier brands would be about €3 billion.
Below tier two, brands seem eager to find traffic and sales whatever the channel. These lower-tier labels have seen their traditional wholesale distribution crumble over the past 20 years: department store chains have gone bankrupt, and independent multi-brand boutiques have exited the market in droves. But they have little option to build directly operated store networks, as they would struggle to generate sufficient sales densities to make them profitable in prime locations
They are the “long tail” of the industry, and they are likely to play ball with anyone offering incremental revenues. But this also makes them more open to Farfetch competitors. Second-tier brands are choosy and prefer Farfetch; more minor brands are likely to play with anyone offering a glimpse of extra sales volumes, even internet giants like Amazon and Facebook, which are moving into high-end distribution.
We assume that these lower-tier brands make up 50 percent of the market, accounting for €100 billion in 2025 sales. We take 75 percent of that as non-direct. And again, with online representing 30 percent of sales by then, Farfetch’s total addressable market in this segment is about €23 billion.
Farfetch has big ambitions in beauty. We expect the category to account for about 21 percent of the total luxury market or about €85 billion in 2025, 75 percent of this generated via non-DTC channels. We expect higher online penetration in beauty than soft luxury: 45 percent. Therefore, Farfetch’s total addressable market in beauty is about 33.75 percent of the wider beauty market or €28 billion.
Farfetch’s total addressable market could be €63 billion.
But beauty is a new focus for Farfetch. And with several players already present in this space, from incumbent retailers moving online like Sephora to newly developed specialist marketplaces like Cult Beauty, it’s safe to assume Farfetch’s market share in beauty will remain lower than in soft luxury.
The hard luxury market will be worth 21 percent of the total luxury market in 2025. But luxury brands in jewellery (take the top four as examples: Cartier, Van Cleef & Arpels, Tiffany and Bulgari) are already 100 percent integrated into retail, and their move online is happening with the same DTC logic.
Watches are the opposite, however, with brands still heavily dependent on multi-brand wholesale clients. And yet, go-to marketplaces for watches already exist, with Chrono24 ahead of the pack. Hard luxury groups are moving in, like Richemont with Watchfinder. And Farfetch currently has little to show in this space. As a result, we expect negligible organic market share for Farfetch in hard luxury (though M&A is an option).
Taking this altogether, Farfetch’s total addressable market across all segments could be around €63 billion by the end of 2025, or 16 percent of the total personal luxury goods market.
Of this, we expect Farfetch’s market share to be 33 percent of the indirect digital fashion and leather goods market, 10 percent of the beauty market and a negligible slice of hard luxury. That adds up to about 18 percent of its total addressable market, with a gross merchandise volume above €11 billion.
Luca Solca is head of luxury goods research at Bernstein.