The Farfetch Business Model – How Does Farfetch Make Money?

Executive Summary:

Farfetch is an online luxury fashion marketplace. It works together with brands and boutiques to sell their products on its platform.

Farfetch makes money from commissions, fulfillment services, a white-label software solution, in-store and online sales, as well as income from the wholesale of products.

Founded in 2007, Farfetch has grown to become one of the world’s leading online fashion marketplaces. The company went public in August 2018. 

What Is Farfetch?

Farfetch is an online luxury fashion platform. The company does not own the inventory it sells but works together with brands and stores to distribute their products. 

Farfetch offers products from close to a thousand luxury brands, including Burberry, Dolce & Gabbana, Gucci, Prada, and many more.

Shoppers can browse a variety of categories, such as clothing (shirts, pants, etc.), shoes, or accessories like bags and watches.

Apart from its online stores, shoppers can furthermore visit Farfetch-branded physical stores. These stores offer a selected number of items that users can try on and buy.

Products on the Farfetch platform are either fulfilled and shipped directly by Farfetch or by one of the many (online) boutiques it partners with.

Boutiques on Farfetch undergo a rigorous verification process to ensure that the products they sell are legit and of high quality.

Farfetch is available in over 190 countries across the world. Users can shop items on its website as well as via its mobile phone app (available on Android and iOS devices).

Farfetch Company History

Farfetch, headquartered in London, UK, was founded in 2007 by José Neves who remains to lead the company as CEO to this date.

Neves, who was born in the mid-1970s in Porto, Portugal, has been fascinated by the power of computing practically his whole life.

At the age of eight, he was gifted a ZX Spectrum for Christmas. Unfortunately, the computer did not come with any games, so he taught himself how to code and developed games for his own pleasure.

Despite his love for computer science, Neves decided to pursue a degree in Economics at the University of Porto.

The degree, so he thought, would provide him with the necessary knowledge to start a business. While still in college, he launched his first business, developing software for local dentists.

Eventually, he met Cipriano Sousa, another Portuguese tech entrepreneur. Together, they launched another business that created software for the many shoe factories around Porto. Neves drew inspiration from his own family since his grandfather ran a shoe factory himself for almost all his life.

Eventually, Neves really started to embrace the world of fashion. He even convinced a local shoemaker, which he met one hour each morning before work, to teach him how to stitch together shoes.

In 1996, when he was just 22 years old, Neves decided to move to London to start his own shoe brand (along with a physical store) called Swear. Inspired by the possibilities of the ascending internet, Neves launched a website for Smart in 1997.

While the internet opened up plenty of sales opportunities, it, unfortunately, did not materialize into actual sales. In 2001, he set up B Store, a shop located on London’s Savile Row that featured the newest pieces from up-and-coming designers.

In 2006, B Store even won the British Fashion Award for Retailer of the Year. Being a boutique owner allowed him to discover little-known brands which didn’t have a way to market themselves. This ultimately served as his inspiration for launching Farfetch.

So in 2007, he again got together with Sousa (who now works as the company’s Chief Technology Officer) to work on Farfetch. A year later, in October 2008, Farfetch was unveiled to the public during Paris Fashion Week.

The site launched with 25 boutiques and around 4000 products on the platform. Two weeks after the unveiling, Lehman Brothers collapsed, paving the way to one of the biggest financial crises the world had ever seen.

Since Farfetch was self-funded, Neves even had to take out loans for his other businesses (Swear and B Store) and lend that money back to Farfetch. To make matters worse, many of the leading designer brands despised the eCommerce movement as it would arguably taint the whole brand experience.

Consequently, the brands gave boutiques an ultimatum: stop selling on Farfetch or we won’t sell our inventory to you. Neves, in an interview with Robb Report, recalled that “it was me, jumping on a plane to Paris, going to Milan and trying to beg them, beg them, to let us have a chance at survival.”

Ironically enough, the financial crisis also played into Farfetch’s hands. As global sales slowed down dramatically, many fashion houses had to find additional channels and ways with which they could promote their products. Farfetch eventually became one of them.

Life became a lot easier when the firm was able to secure its first round of funding, raising $4.5 million from Advent Venture Partners in July 2010. In the coming years, Farfetch continued to add more funding to its balance sheet. And since its aggregator model often surfaced local boutiques, it was able to quickly expand into new countries and continents.

In September 2015, after recently being valued at $1 billion and entering the unicorn club, Farfetch announced the launch of Farfetch Black & White. This service, similar to Shopify, allowed established brands like Manolo Blahnik to set up their own online storefront.

2017, in particular, proved to be an eventful year for the company. First, it was able to add Net-a-Porter founder Natalie Massenet as a non-executive co-chairman. Massenet left her company after its merger with Yoox in 2015. Although she stepped down from her role in 2021, the announcement sent shockwaves across the luxury fashion industry.

A month later, in March 2017, Neves introduced the Store of the Future, a physical store concept that uses its customer’s data to make tailored recommendations. The foundation for this concept was the Browns boutique store which Farfetch acquired two years prior.

Farfetch’s first major acquisition was announced in June 2017 when it paid $100 million for Style.com, a shopping platform developed by Condé Nast (publisher of Vogue and GQ). The purpose was to acquire Style’s user base and further the firm’s expansion into the US market.

Similarly, Farfetch made a big move into China a month later. Online retailer JD.com invested $397 million into Farfetch while announcing various jointed efforts, such as tapping into JD’s 90-minutes courier service. Later, in February 2019, Farfetch opened its own flagship store on the JD.com platform.

The company remained in expansion mode entering 2018. For instance, announced partnerships with the likes of Burberry and Chanel (which avoided selling online for the longest time) – with the latter obtaining a minority stake in the company.

These partnership announcements were vital to present a compelling growth story to investors. Rumors about an IPO had been swirling around for months. In August 2018, the company finally filed to go public on the Nasdaq stock exchange (under the ticker symbol FTCH).

Being a public company opens you up to much greater scrutiny, a lesson that Neves especially learned in 2019. After two major acquisitions, namely buying Stadium Goods for $250 million and New Guards (which holds licenses for brands like Off-White and Palm Angels) for $675 million, investors grew increasingly worried that Farfetch would move away from its marketplace model, which often possesses much greater margins.

The acquisitions also negatively affected the company’s balance sheet and substantially widened its losses. As a result, its stock price plummeted to below $8, down over 50 percent from the day it went public. Some existing backers even contemplated filing a class-action lawsuit against the company, arguing that Farfetch misled them about its business model and strategic direction.

Luckily, Farfetch got back on track in 2020. The ascend of the novel coronavirus forced many people to shift to online shopping – and sent the company’s stock to new all-time highs. China, in particular, became a huge growth opportunity. Farfetch even established a separate entity under the name Fafaqi, which roughly translates to “explore wonder”.

To that extent, Farfetch announced a global strategic partnership with Alibaba and Richemont, which invested $300 million each into Farfetch Limited and another $250 million each into Farfetch China. As a consequence, Farfetch terminated its partnership with JD.com and launched new shopping channels on Alibaba’s Tmall Luxury Pavilion, Luxury Soho, as well as Tmall Global. 

Today, Farfetch is one of the leading luxury stores across the world. It employs over 5,000 people and counts over two million active customers.

How Does Farfetch Make Money?

Farfetch makes money from commissions, fulfillment services, a white-label software solution, in-store and online sales, as well as income from the wholesale of products.

Let’s take a closer look at each of these in the section below.

Commissions

The bulk of the revenue that Farfetch generates comes from the commissions that brands and boutiques pay when they sell on the platform.

These commissions are bound to contractual agreements between those partners and Farfetch. Presumably, they range between 25 to 32 percent.

Commissions for larger brands like Burberry or Gucci would probably be on the lower end of the spectrum due to heightened negotiation power.

Farfetch effectively operates on a marketplace business model. It holds almost no inventory itself (only through some of its acquired brands and store concepts) and acts as an aggregator.

Aspects like content creation and product sorting become extremely important to surface the highest converting products possible.

To that extent, Farfetch is in a position to impose high-quality requirements on its partners, namely that products are available at all times, of high quality, and served in a compelling format (boutiques on Farfetch can organize their own shipping if they want to).

Fulfillment

As part of its marketplace model, Farfetch offers various fulfillment services to the brands and boutiques it partners with. 

Fulfillment services include the storage of goods (= warehousing), item delivery, as well as managing returns.

This mimics other marketplace companies which have implemented fulfillment services themselves. Examples in the fashion industry include StockX or Poshmark.

Similar to its marketplace commissions, Farfetch takes a percentage cut based on the sale price. This is believed to be equal to 8 percent.

White-Label Solution

Farfetch Platform Solutions (previously called Black & White) is a white-label software as a service offering for luxury fashion brands and retailers.

The solution offers a variety of features, including:

  • The ability to build their own branded website while tapping Farfetch’s delivery network
  • Launching their own iOS app
  • Operating a WeChat store account tailored towards Chinese customers
  • Seamless integrations into the Farfetch marketplace

Pricing for the offering is not publicized. But just like any other white-label solution, it can be assumed that it is comprised of a fixed payment (for the initial app and website development, amongst others) and revenue sharing agreement (i.e. Farfetch receives a percentage of the revenue that the store generates).

In-Store & Online Shopping

As previously stated, Farfetch acquired a variety of physical retail fashion businesses throughout its existence. Examples include Browns, Stadium Goods, as well as New Guards.

Just like any traditional retail store, Farfetch generates revenue through the sale of products (which are either happening in-store or online).

The income has to be subtracted by the cost of goods sold, that is the cost associated with buying the products, paying for store rent and employees, and other associated costs. 

Wholesale Distribution

As part of its New Guards acquisition, Farfetch also inherited a variety of established luxury fashion brands. These include Off-White, Heron Preston, Alanui, and a few more.

Consequently, these brands are distributed on a wholesale basis to a variety of boutiques, retail and online stores for sale. Farfetch generates revenue by selling these products on a wholesale basis to other businesses.

Farfetch Funding, Revenue & Valuation

According to Crunchbase, Farfetch has raised a total of $1.6 billion across 12 rounds of equity and debt funding.

Notable investors include Alibaba Group, e.ventures, Dragoneer Investment Group, Tencent, JD.com, Index Ventures, and many more.

When Farfetch went public in September 2018, where it raised another $885 million, its business was valued at $5.8 billion. Today, that valuation has risen to over $18 billion.

In 2020, Farfetch generated $1.67 billion in revenue, up from the $1.02 billion it recorded in 2019.  

Viktor

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..