Thursday, Aug 19th 2021

We've invested in Farfetch: "Etsy meets Luxury"

Investor Update

We’ve initiated a position in Farfetch (FTCH), the leading online luxury marketplace, for the Titan Opportunities strategy. Farfetch’s platform has 3.5K+ brands (of which 550+ are via e-concessions) serving 3.3M+ active customers worldwide, with the most extensive selection of luxury goods on a single site.

Farfetch’s e-concession model

The luxury industry is currently undergoing a structural change: not only are premium brands placing more inventory online, they are also moving away from wholesale distribution.

Historically, brands have sold some of their inventory at wholesale prices to retailers like Barney’s. However, by selling their inventory to these retailers, brands have lost a degree of control over the pricing of their products, their inventory, and the overall customer experience, all of which are largely left to retailers’ discretion.

For brands which have invested millions of dollars and decades of effort in cultivating a particular brand image, this lack of control can be extremely costly. But until recently, they did not have much choice. With the emergence of the e-concession business model, we believe that the wholesale channel as we know it today will become structurally impaired over time, strengthening the luxury industry’s shift online.

We believe Farfetch is poised to be a massive beneficiary of this trend. Farfetch’s e-concessions model (which is unique in the industry today) allows brands to sell directly to consumers through Farfetch’s platform.

By using Farfetch’s platform, luxury businesses are given substantially more favorable economics (45% margins via e-concessions vs. 30% margins through wholesale and consignment). More importantly, companies are given greater control over their brand’s ethos and perception, as well as real-time control of pricing and inventory.

Additionally, our research indicates smaller well-known luxury brands generate 5x the sales on Farfetch, versus their brand’s own website.

We believe that the luxury industry’s shift to e-concessions, coupled with Farfetch’s large sales, positions FTCH for massive market share gains over the long term.

Farfetch’s bolstered presence in China

Luxury isn’t just shifting online; it’s shifting continents, too. China is expected to account for 48% of luxury spend by 2025, versus its 33% in 2019. The rise of China’s Tier 2-3 cities -- as well as the lack of storefronts located in those regions -- suggests to us that China’s online luxury market will accelerate over the next five years. In addition to these structural changes, Farfetch launched a partnership with Alibaba’s Tmall Luxury Pavilion (TLP) earlier this year -- a platform with ~80% market share of China’s online luxury apparel market.

Through this partnership, 828M active consumers on Alibaba’s China retail marketplace can access the Farfetch store, via a banner and navigation button at the bottom of TLP’s homepage.

Our research indicates that the majority of TLP sales have come from smaller luxury brands previously not on TLP, indicating to us that FTCH should be able to scale on TLP overtime, as (1) luxury spend is fragmented in China, with the top-selling brand holding less than 5% market share; and (2) FTCH brings 90% more brands to TLP. In other words, 90% of the luxury brands on TLP can only be accessed through Farfetch.

Valuation and risk/reward for FTCH

We believe the confluence of Farfetch’s strong expected market share gains and bolstered presence in China results in a highly-attractive investment opportunity. If FTCH continues to execute as it has in prior years, we believe the stock could increase 2x+ over the next 3-5 years.

The biggest risk with owning FTCH today is its performance on Tmall Luxury Pavilion, its growth accelerator in China. We believe the market is currently pricing in mid-single-digit gross merchandise value (GMV) penetration for FTCH sales on TLP by 2022 (vs. 2021’s 1-2% annual run-rate as of today), and we believe that the upcoming share price movements will be largely attributed to fluctuations in FTCH’s TLP GMV growth.

Although the risk of the partnership underperforming is a major one to be sure, we expect the confluence of FTCH’s massive inventory, growing luxury spend in China, and TLP’s dominant (~80%) market share of online luxury goods is positioning FTCH to grow TLP GMV by triple-digits annually for the next few years.

Online luxury is gated and poised for take-off

We believe there are extremely high barriers to entry for multi-brand luxury platforms like FTCH. Luxury brands are very selective of the sites they chose to be on, and at this stage of the industry’s growth, we believe it is unlikely that a new up-and-comer will successfully compete with FTCH’s scale and existing brand relationships.

We’ve seen these tailwinds previously in the apparel industry, and believe the online luxury industry is poised for take-off. Given Farfetch’s e-concessions model and its ability to garner large sales volumes for brands, we believe that FTCH is best-positioned to become the winner across the online luxury industry.

We are thrilled to introduce this best-in-class company to the Titan Opportunities portfolio.

Click here to watch a short video outlining our FTCH thesis from Titan investment analyst Justin Yoo. You can download our thesis in PDF form here.

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