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Farfetch’s IPO launched today at a luxury-price of $20 per share, above estimates it would list between $17-$19. Reports are that early trading jumped 52% as “investors placed their bet on the company's technology and unique niche in high-end luxury,” said CNBC.
This valuation pegs Farfetch at $6.2 billion, which is mind boggling for a company that has yet to turn a profit and lost $112 million last year on $386 million in sales.
Comparisons to Jeff Bezos and Amazon’s 1997 IPO filing comes immediately to mind. At the time, Amazon was a tiny niche e-commerce bookseller, with fewer than 300 employees and just under $16 million in sales and with losses nearing $6 million.
Betting on the long tail
What garnered support for Amazon’s IPO was a staggering 2,982% growth rate, from revenues of $511,000 in 1995 to $15.75 million in 1996. The IPO raised $54 million for Amazon, giving the company an initial market value of $438 million.
Since its founding Bezos has relentlessly focused on long-term growth, knowing that at some point profits would follow. In its first year as a public company sales grew 838% to $147.8 million, but loses mounted as well. It took until fourth quarter 2001 for the company to turn a profit, but that was a mere $5 million.
From day one Bezos had his eye far beyond books, at the time a $26 billion market. “Our goal is to move quickly to solidify and extend our current position while we begin to pursue the online commerce opportunities in other areas,” he wrote in the 1997 letter to shareholders.
Bezos had a vision and built a business model for online e-commerce that he tested in one vertical – books – but which he knew had application for many other categories as well.
And here we are, 21 years later, with Amazon selling everything from A-to-Z online, as its logo underscores, as well as offering cloud computing, advertising and media services and operating brick-and-mortar retail through Whole Foods and its growing chain of Amazon Go stores. Thanks to his vision and focus, Jeff Bezos is now the richest man in the world.
Farfetch’s value is in its business model
Bezos did it by building Amazon on a new business model fitted to this internet-age: The Platform Business model, which Applico’s Alex Moazed and Nicholas Johnson call “Modern Monopolies,” in their book of the same name.
This is the same business model that Jose Neves has used to build Farfetch. Both Bezos and Neves understand that today retail is no longer about the “What” but the “How.”
Admittedly, the world of luxury fashion that Neves operates in is both more glamorous, and infinitely more complicated than books were when Bezos started. And Neves has the distinct advantage of standing on the shoulders of Bezos, who forged ahead with an idea that no one but perhaps he himself could envision.
But then too, Neves isn’t dragged down by having to build mammoth physical warehouses and infrastructures that Bezos’ Amazon requires.
Unlike Amazon, Neves’ Farfetch business is a pure-play platform where its value is based upon creating “value by facilitating exchanges between two or more independent groups, usually consumers and producers,” as Moazed explained to me.
Farfetch never takes physical control of the products it sells, rather it facilitates the exchange between buyers and nearly 1,000 sellers, which include 614 retailers and 375 luxury brands. It simply is the go-between for boutiques that own the products to the buyers who want the products. Farfetch sellers fulfill the orders.
Amazon still has some linear aspects to its largely platform model where it owns some of its inventory and manages shipping. “ Platforms don’t, to use a common phrase, own the means of production – instead, they create the means of connection ,” Moazed explained.
Fashion is a fickle business, but Farfetch has that covered
Farfetch is a true partner with the world’s best fashion boutiques where the fashion and style expertise resides. Farfetch isn’t at risk as styles change and consumers move on. As a virtual company, it will move along with them to offer access to new boutiques and brands that answer the call.
Farfetch’s business partners have “the best brands and great buyers with a completely unique point of view on fashion. The only thing they were missing was that online presence,” Neves explained in an interview with Savoir Flair. “We are a tech platform for the best curators and creators of fashion and we are obsessed with providing our customers with a completely unique experience.”
In other words, what Farfetch does is give its independent retail partners an authentic, reliable and cohesive way to put its stock for sale in a global marketplace. It truly supports the retailers’ mission, unlike Amazon’s third-party marketplace which in many ways competes directly with its retail Marketplace partners and also imposes strictures that are increasingly difficult for these partners to swallow.
Farfetch is creating a powerful data-driven technology company, learning what customers want today and applying those insights into what they may want tomorrow. “Our team [of data scientists] is looking at developing models to measure propensity to go to a second order, lasting likelihood and scoring customers based on levels of engagement in various scenarios,” Neves said.
It is also learning about what independent retailers want, i.e. more sales and more customers, and how to build rewarding partnerships with them.
It is what Natalie Massenet, founder of Net-a-Porter and now non-executive Co-Chairman of Farfetch described as the emerging “collaborative economy, when businesses that might normally be seen as competitors are working together towards the same goal of giving the best possible product and service,” in the joint Savoir Flair interview.
“Farfetch enables independent boutiques around the world to reach and sell to a global audience,” Massenet continued.
It doesn’t take much imagination to see where and how far Farfetch can go if it chooses to look beyond fashion and accessories into other luxe categories where independent retailers are planted. Jewelry seems like the next logical retail vertical, with fashion for the home and gifts not far behind.
The affluent customers that Farfetch has cultivated, some 2.3 million it reports, have an appetite for goods and services that extend far beyond fashion. And since by most estimates some 75% or so of retail will remain in brick-and-mortar establishments, there will be a never-ending supply of physically-rooted retailers wanting a crack at the kind of customers that Farfetch has hold of online.
I foresee great possibilities for Farfetch in the future. It’s platform business model is the key to that success.
