Strategic Analysis: FARFETCH [final]

Strategic Analysis Project Br yan Kaetz | 5 November 2020 LEAD 701 - From Agoras to Digital Markets: Fundamentals of Business Design Professor Jeremy Kobus | Fall 2020

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Contents Executive Summar y

4 6 22 Part One

Part Two

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Part Three

36 50 90 Part Four

Presentation

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Executive Summary

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n this project, the overall business of Farfetch was analyzed in order to create a strategic recommendation for the future of the business based upon a number of considerations. First, the business model, general operations, and histor y of the brand were considered to provide the scope and background information needed to analyze the environment in which Farfetch operates within. Secondly, the brand’s mission, values, and vision statements were def ined within this scope of their operations. Third, business leadership was identif ied to understand the important operational functions that Farfetch considers their top priorities for development, In the second part of this project, the driving forces that could affect Farfetch’s business in regard to political, economic, socio-cultural, technological, legal, and environmental factors were identif ied and analyzed. In the third part of this project, Farfetch’s annual report was analyzed in consideration of each f inancial statement, including the Income Statement, Balance Sheet, and Statement of Cash Flows, to determine the brands f inancial positioning as well as the strengths and weaknesses of this f inancial position. Finally, full marketing and competitive analyses were executed in the scope of two of Farfetch’s products: their e-commerce platform and their bricks-and-mortar subsidiar y, Browns; along with a presentation of Farfetch’s strengths, weaknesses, opportunities, and threats and that of its two closest competitors, YOOX Net-a-Porter and Zalando.

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arfetch possesses a strong business model with their lack of holding inventor y and acting only as a selling platform and logistics company—yet earning a 30% commission off each luxur y sale on their global platform. The brand is truly global, operating in nearly 200 countries and continually expanding. Currently, the brand is focused on growth, development, and market share, f inancing their operations through debt. Their signif icant costs in selling, general, and administrative expenses and internal investments prove their commitment to the brand’s growth and dominance of the market. There are many opportunities for the brand to continue to improve upon their brand promise and mission.

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ey recommendations that were determined included the utilization of a personal shopping ser vice, the integration of physical and digital ser vices to create a “phygital” offering, and f inally, to better leverage the brand’s strong assets to gain a healthier prof it position moving forward. The luxur y customer is demanding more and more personalized ser vices and increased attention from the brands they shop with. Providing options like personal shopping from a bricks-and-mortar and “live” on-site experience would give this customer exactly what they are looking for. The second recommendation would see an integration of Farfetch’s great assets like their platform solutions and physical retail to provide better offerings to their consumers. By allowing increased transparency between platforms, employees would be able to better ser ve customers across the board—whether they want to buy online and pick up in store, have something out of stock at Browns shipped quickly to them from Farfetch.com, or any other potential uses for this up-and-coming technology. The third and f inal recommendation makes light of Farfetch’s poor prof it position—in that the brand has been operating at a loss since its founding in 2007 despite being on target with guidance set by its board. Utilizing their signif icant assets, acquisitions, and technologies to slow the pace of their growth to decrease their debt position in order to see a prof it.

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6 PART ONE

Contents

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Section 1: Business Over view & Histor y

8 12 18

Section 2: Mission, Vision, & Values

Section 3: Business Leadership

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Section 1: Business Overview & History

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Contents

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Histor y

10 11 Business

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2007: Founded by Jose Neves

Company History

2008: Off icially launched in Europe and Portugal, where it is headquartered 2010: Secured $4.5 million to expand to Americas 2015: Store of the Future opens, utilizing Augment Reality technology 2015: Acquired Browns, luxur y bricks-and-mortar store

2019: Acquired New Guards Group, owner of Virgil Abloh-led Off-White

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2018: Initial Public Offering, raised $885 million with 33.6 million shares

2020: Scores exclusive digital partnership with Fenty

Farfetch’s additional businesses include Farfetch Platform Solutions, which ser vices enterprise clients with e-commerce and technology capabilities; Browns and Stadium Goods, which offer luxur y products to consumers; and New Guards, a platform for the development of global fashion brands. Farfetch also invests in innovations such as its Store of the Future augmented retail solution, and develops key technologies, business solutions, and ser vices for the luxur y fashion industr y.

Business Offerings

Farfetch Limited is the leading global technology platform for the luxur y fashion industr y. Farfetch began as an e-commerce marketplace for luxur y boutiques around the world. Today, the Farfetch Marketplace connects customers in over 190 countries with items from more than 50 countries and over 1,200 of the world’s best brands, boutiques and department stores, delivering a truly unique shopping experience and access to the most extensive selection of luxur y on a single platform.

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Section 2: Mission, Vision, & Values

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Contents

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Mission Statement

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Vision Statement

Values in Work

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mission statement

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Farfetch exists for the love of fashion.

We believe in empowering individuality.

Our mission is to be the global technology platform for luxur y fashion, connecting creators, curators, and consumers.

Vision Statement

To be the global technology platform for luxur y fashion.

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Company Values

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BE REVOLUTIONARY

THINK GLOBAL

BE HUMAN

Commiting to reducing their carbon footprint, Farfetch plans to offset their carbon impact through packaging eff iciency, renewable energy, and emissions resulting from deliveries and returns through its Climate Conscious Deliver y initiative.

Supporting a more circular fashion economy, Farfetch launched “Positivly Farfetch,” a sustainability-focused initiative headed by the brand’s Chief Commercial & Sustainability Off icer to unite designer, operations, and retail partners around this effort.

Amid the pandemic, Farfetch mobilized considerable resources to support their small boutique partners weather the storm.

The company provided marketing, logistics, and fulf illment ser vices to these smaller partners signif icantly affected

TODOS JUNTOS

BE BRILLIANT

Partnered with Thrift+, an on-demand donation ser vice for second-hand clothes, for Farfetch’s customers to easily donate unused clothes. Customers are able to order a donation bag online and select a charity that resale of the garment benef its.

With their Dream Assembly start-up program, Farfetch supports up-and-coming f irms and shaping the future of fashion and retail. This program shows the company’s commitment to the greater good for all, or “todos juntos.”

Farfetch recently launched their Fashion Footprint tool, helping consumers see how their wardrobes and purchasing decisions affect the planet.

This effort is part of the company’s overarching Positively Farfetch sustainability initiative.

Values at work

AMAZE CUSTOMERS

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Section 3: Business Leadership

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Contents

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Organization Leadership

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organizational Leadership

JOSE NEVES Chief Executive Officer

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Founded Farfetch in 2018, merging his passions for tech and fashion. Founded successful brands like SWEAR and SIX London previously, and won a British Fashion Award for his boutique, bstore, in 2006.

ELLIOT JORDAN Chief Financial Officer

Joined Farfetch in 2015 and led the company’s IPO on the NYSE. Previously the Director of Finance at ASOS and J Sainsbur y.

STEPHANIE PHAIR Chief Customer Officer

Founded OutNet.com and was part of the Executive team at Net-a-Porter. Phair has also worked at Issey Miyake and Vogue, and currently chairs the British Fashion Council.

MARTIN AVETISYAN Chief Growth Officer

Responsible for the company’s international growth, strategic partnerships, and M& A .

Founded iMall, which Farfetch acquired in 2015.

GIORGIO BELLOLI Chief Commercial & Sustainability Officer

Oversees merchandising, development, and account management.

Belloli has worked for Miu Miu, Helmut Lang, Prada, and Alexander Wang.

CIPRIANO SOUSA Chief Technology Officer

Sousa has worked at Farfetch with Neves since the beginning, with 20 years of prior experience in tech and e-commerce.

LUIS TEIXEIRA Chief Operations Officer

Manages global operations as well as all Portugal off ices. Teixeira has been with Farfetch for over six years.

GARETH JONES Chief Marketing Officer

Having joined the company this year, Jones is the newest Chief Executive. He was previously the CMO at eBay.

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22 PART ONE

Contents Political

24 26 28 Economic

Socio-Cultural

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Technological

30 32 34 Legal

Environmental

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Political

“Brexit is negative. It will create problems for businesses. In our case, our biggest concern is talent. We have a big percentage of our team who are from the European Union and other countries. That’s what makes London such a great city.

Brexit was def initely a move towards more controls in terms of immigration. That will af fect the ability to attract talent.”

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JOSE NEVES CEO and Chairman, Farfetch BREXIT With great uncertainty of future involvement with the EU, UK fashion companies are on unsure footing. Farfetch is also headquartered in London.

EMPLOYMENT POLICIES Countries around the world regulate employment in varied ways. Global companies are challenged to ensure proper policy on a worldwide basis.

EASE OF DOING BUSINES Similarly, business regulations var y greatly from countr y-to-countr y.

RISE OF CHINESE LUXURY Paired with a rise in Chinese consumption of luxur y goods and increased control of Hong Kong, Farfetch will be challenged to follow all business guidelines in China. China ranked 31/191 versus Hong Kong’s 3/191 in Ease of Doing Business.

The majority of apparel, textiles, and similar manufacturing businesses are included in List 3 or List 4A to be tarif fed up to 25% of landed costs from China to the US. On Sept. 15, the World Trade Organization found the United States breached global trading rules by imposing multibillion-dollar tarif fs in Trump’s trade war with China.

DAVID SHEPARDSON Reuters

political

TAX POLICIES As witnessed with the US-China trade war, tax & trade policy can change in an instant and varies countr y-to-countr y. This also has great effects with legal and economic factors.

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Economic

“In China, we have had a ver y successful business for the past two years. We saw, and to be honest JD.com too, the opportunity to double down because quite clearly we have the proposition for the Chinese customer which works.�

JOSE NEVES CEO and Chairman, Farfetch CHANGE IN LUXURY CONSUMERS With more and more luxur y business moving to China, there are many potential challenges for companies doing business in the countr y.

As Beijing cracks down on the sovereignty of Hong Kong, fashion companies have more and more reason to open storefronts in mainland China.

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COVID-19 The pandemic signif icantly impacted the luxur y fashion industr y - from greatly-reduced foot traff ic in many stores to fewer tourists, yet a signif icant increase in luxur y e-commerce.

COMPETITORS Amazon (amongst others) is getting into the luxuxr y e-commerce game with their Luxur y Stores marketplace.

Economic

LUXURY TRAVEL REVENUE Luxur y revenues from tourism spending tends to make up a large percentage of these brands’ total revenues. With dismal travel forecasts, this will continue to decline.

GLOBAL WEALTH The number of high net-worth individuals (HNWIs) across the globe is increasing. With

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Socio-cultural

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% of urban households in China, by annual household disposable income

CHINESE CONSUMERS The Chinese culture will continue to impact global trends, especially for the luxur y goods industr y. As this culture focuses more on the collective and is gaining an increased wealth, luxur y companies need to pivot their business models to the vastly different Chinese market. From Alibaba’s T-mall to streaming apps and payment options, luxur y brands must embrace the digital future not only to maintain prof itability, but in order to sur vive.

COVID-19 The current pandemic has truly changed the face of the global marketplace. This situation evolves day-to-day with no complete end in sight.

SOCIAL ATTITUDE OF LUXURY In times of prosperity, luxur y is f launted, shown off, and emblazoned with logos. Following the pandemic, luxur y consumers may want to be quieter about their purchases and opt for more subtle, personal luxuries.

GROWING OLDER POPUL ATION As life expectancy increases globally, so does the aging population. Older consumers tend to be more conser vative in their values and spending, but they do have the money to spend and are loyal to brands they know.

socio-cultural

POPUL ATION GROWTH While the aging population is growing, so is the total population overall. Despite a growing population, the rate of growth has been steadily declining from its highest at over 2% in the 1960s and is projected to stagnate by the end of the centur y.

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30 technological

FASTER SUPPLY CHAINS Technology and consumer demand are increasing the speed from production to end consumer - hello, 2-day shipping! To maintain competitiveness, f irms continue to improve, advance, and speed up.

AR + VR Luxur y brands, especially those with physical locations, utilize advancing technologies such as virtual and augmented realities to improve their customers’ experiences in-store and online in steadily growing formats.

AI Artif icial intelligence and automation are speeding data analytics and reducing time needed for previously labordriven jobs. As ser vicefocused companies rise, product-focused companies are continually replacing workforce with robotics.

technological

E-COMMERCE Online shopping has advanced from physical only to multichannel, omnichannel, and beyond.

New technologies develop daily to improve e-commerce experiences. Following the start of the pandemic, digital markets have grown exponentially and will continue to do so.

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VARIED COUNTRY REGUL ATIONS A f irm like Farfetch that does business on a global scale must ensure to follow all local and national regulations, crossing ever y t and dotting ever y i.

legal

INTELLECTUAL PROPERT Y The focus (or scapegoat) of various trade wars and repurcussions, IP is an important consideration for companies desiring to protect their competitive advantages.

CONSUMER PROTECTION From health and safety to countr y-of-origin and data privacy, legal ramif ications var y.

Online-based companies like Farfetch must ensure the protection of not only their consumers’ physically, but also any digital assets they have acquired.

EMPLOYMENT L AWS Labor laws may be strict in Western, f irstworld countries, but developing areas such as parts of Asia and the Middle East still have little labor regulation. Companies have to be aware of each and ever y law.

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INCLUSION EFFORTS As the US faces racial reckoning, global communities demand more and more inclusive efforts from companies. Legal ramif ications var y from countr y-to-countr y.

legal

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34 environmental

• CARBON EMISSIONS REDUCTION • RENEWABLE ENERGY

environmental

CSR + ENVIRONMENTAL PRACTICES Consumer demand increasingly supports greater environmentally-minded efforts from a company perspective. From waste to emissions, luxur y brands especially have to validate the effects they leave on the world and do what they can to reduce that footprint, including efforts such as:

• ETHICAL L ABOR

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36 PART THREE

Contents

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Section 1: Income Statement Analysis

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Section 2: Balance Sheet Analysis

Section 3: Statement of Cash Flows Analysis

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Section 1: Income statement analysis

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Consolidated statements of operations for the year ended December 31, (in $ thousands, except share and per share data) Revenue Cost of revenue Gross profit Selling, general and administrative expenses (Losses)/ gains on items held at fair value Share of profits of associates Operating loss Finance income Finance costs Loss before tax Income tax expense Loss after tax (Loss)/Profit attributable to: Equity holders of the parent Non-controlling interests Loss per share attributable to owners of the parent Basic and diluted Weighted-average shares outstanding Basic and diluted

Note

2017

2018

2019

385,966 (181,200 ) 204,766 (295,960 ) (3,300 ) 31 (94,463 ) 2,833 (20,475 ) (112,105 ) (170 ) (112,275 )

602,384 (303,934 ) 298,450 (471,766 ) 33 (173,283 ) 38,182 (18,316 ) (153,417 ) (2,158 ) (155,575 )

1,021,037 (561,191 ) 459,846 (869,609 ) 21,721 366 (387,676 ) 34,382 (19,232 ) (372,526 ) (1,162 ) (373,688 )

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(112,275 ) (112,275 )

(155,575 ) (155,575 )

(385,297 ) 11,609 (373,688 )

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(0.50 )

(0.59 )

(1.21 )

4

8 5,30 9 9 10 11

12 223,465,734 264,432,214 318,843,239

The accompanying notes are an integral part of these consolidated financial statements

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Income statement

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Over the last three years, Farfetch’s expenses have skyrocketed altogether, showing the greatest increase in Sales, General, and Administrative expenses, which increased over 80% year-overyear. Further analysis as we move forward in the f inancial statements also shows great investment increases as Farfetch focuses on growth efforts moving into the future. While gross prof it margin is in the positive, these expenses pull Farfetch into an overall operating loss.

Revenues increased over 50% year-over-year for the past three years, with an inrease of 70% in 2019 alone. Per Farfetch’s 2020 Q1 and Q2 reporting, these revenues are still increasing at an average level of +74%. On the other hand, with consistent operating losses, the company’s net loss increased 140% in 2019 alone.

While the Income Statement shows a lack of prof it, there are many other considerations to take into account assessing the f inancial situation of Farfetch in general, especially considering their aforementioned growth and investments to do so. Farfetch’s founder and CEO, Jose Neves, mentioned the company is still performing to board guidance to be prof itable come 2022 after this signif icant growth investment.

Income statement

Another signif icant consideration presented in the Income Statement would be Farfetch’s Earnings per Share as this is an important metric for potential investors to look at prior to purchasing shares. 2019 saw EPS tank to -$1.21 per share, which will later show the organization’s utilization of equity - or return on equity - when we analyze the cash f lows.

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Section 2: Balance Sheet analysis

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Non-current assets Trade and other receivables Deferred tax assets Intangible assets, net Property, plant and equipment, net Right-of-use assets Investments Investments in associates Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity Share capital Share premium Merger reserve Foreign exchange reserve Other reserves Accumulated losses Equity attributable to owners of the parent Non-controlling interests Total equity Non-current liabilities Provisions Lease liabilities Deferred tax liabilities Other liabilities Put and call option liabilities Total non-current liabilities Current liabilities Trade and other payables Lease liabilities Put and call option liabilities Other current financial liabilities Total current liabilities Total liabilities Total equity and liabilities

December 31, 2018

December 31, 2019

14 27 15 16 17 18 18

10,458 103,345 37,528 566 86 151,983

12,388 5,324 1,362,967 67,999 115,176 16,229 2,466 1,582,549

13 14 19

60,954 93,670 1,044,786 1,199,410 1,351,393

128,107 194,794 322,429 645,330 2,227,879

20 20 20

11,994 772,300 783,529 (23,509 ) 67,474 (483,357 ) 1,128,431 1,128,431

13,584 878,007 783,529 (30,842 ) 349,463 (826,135 ) 1,167,606 170,226 1,337,832

Note

21 23 26 17 27 31 30

13,462 15,342 28,804

23,704 100,833 219,789 16,455 61,268 422,049

24 17 30

194,158 194,158 222,962 1,351,393

447,586 18,485 1,118 809 467,998 890,047 2,227,879

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balance sheet

From 2018 to 2019, Farfetch experienced signif icant shifts in their balance of assets, liabilities, and equity. Assets were the most signif icantly affected as current assets decreased 46% while long-term assets increased 941%.

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This shift is explained by a signif icant increase in intangible assets (+129%) and investments paired with a decrease in cash and cash equivalents of -70%. This change is balanced by increases in total liabilities of +65%. Generally, these shifts prove Farfetch’s greater investment in their own assets that they seem to only be f inancing through debt, including their trade and other payables.

As discussed on the next page in consideration of their current and quick ratio assessments, Farfetch does still maintain a positive assets to liabilities ratio and can cover their shortterm debts even without selling inventor y.

As the quick ratio, or acid test, removes current inventories out of the equation, Farfetch’s business model allowed it to maintain a reduced inventor y situation compared to competitors.

Considering their business model, Farfetch is poised to compete more so with the likes of Alibaba and Amazon as a vendor marketplace with varied storefronts owned by these brands and boutiques themselves. This model allows Farfetch to avoid a signif icant amount of cash tied up in this asset.

balance sheet

The industr y average for current ratio of similar companies is 1.39. In 2018, Farfetch’s current ratio was signif icantly higher than the industr y at 6.18, showing a signif icantly reduced utilization of the assets the company possessed. Last year, the brand turned this around signif icantly and reinvested their assets in their pursuit of growth, ending the year with a current ratio just under average at 1.38. This result also put the brand in line with direct competitors such as Zalando and YOOX Net-A-Porter.

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Section 3: Statement of cash flows analysis

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Cash flows from operating activities Loss before tax Adjustments for: Depreciation Amortization Non-cash employee benefits expense Net loss/(gain) on sale of non-current assets Share of profits of associates Net finance income Net exchange differences Impairment of investments Change in the fair value of derivatives Change in the fair value of put and call option liabilities Change in the fair value of acquisition related consideration Changes in working capital Increase in receivables Increase in inventories Increase in payables Changes in other assets and liabilities (Increase)/decrease in non-current receivables Increase in other liabilities Decrease in provisions Other items Income taxes paid Net cash outflow from operating activities Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired Payments for property, plant and equipment Proceeds on disposal of property, plant and equipment Payments for intangible assets Interest received Payments for investments Net cash outflow from investing activities Cash flows from financing activities Proceeds from issue of shares, net of issue costs Repayment of loan notes Repayment of the principal elements of lease payments Interest and fees paid on loans Net cash inflow/(outflow) from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year

Note

16,17 15

8 8

5

2017

2018

2019

(112,105 )

(153,417 )

(372,526 )

3,648 7,332 16,578 42 (35 ) (1,261 ) 12,196 44 -

7,338 16,199 53,819 1,028 (33 ) (19,866 ) 7,621 (506 ) -

28,536 85,055 138,195 (144 ) (366 ) (15,150 ) (842 ) 5,000 (117 ) (43,247 ) 21,526

(598 ) (35,163 ) 47,406

(72,151 ) (10,345 ) 57,432

(51,273 ) (29,723 ) 113,721

(3,826 ) 7,365 (591 ) (352 ) (59,320 )

(1,265 ) (701 ) (536 ) (822 ) (116,205 )

3,723 11,575 (4,252 ) (5 ) (16,328 ) (126,642 )

195 (12,616 ) (18,997 ) 2,833 (278 ) (28,863 )

(21,137 ) (50,978 ) 8,865 (288 ) (63,538 )

(461,691 ) (39,512 ) 272 (72,985 ) 11,259 (20,846 ) (583,503 )

322,097 (21,955 ) 300,142 211,959 150,032 22,011 384,002

859,526 859,526 679,783 384,002 (18,999 ) 1,044,786

8,654 (19,127 ) (4,776 ) (15,249 ) (725,394 ) 1,044,786 3,037 322,429

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statement of cash flows

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While the graph to the left notates the dollar amounts per the statement, these are truly cash expenditures versus negatives and positives.

From 2017 to 2019, f inancing cash f lows likely experienced the most signif icant f luctuations as the company received signif icant investment in 2018 that it most likely utilized in 2019. Also during 2019, Farfetch’s invested much more heavily at an increased rate of 818%, also explaining their signif icant changes in assets from the balance sheet.

While free cash f low signif icantly jumped in 2018 and also decreased in 2019, the brand still maintains a strong cash position at $322,429,000 in available cash - nothing to balk at. Again, this change proves even further that Farfetch is commited to investing in its growth and achieving a greater market share to dominate the luxur y e-commerce space.

Generally, Farfetch utilized debt to f inance their investments over equity. Per the statement of cash f lows, proceeds from issues of shares dropped signif icantly by 98% while increase in payables increased the same at 98%, and increase in liabilties shot up by over 55%.

statement of cash flows

As one can see in the graph to the right, Farfetch signif icantly invested in acquisitions for 2019.

This categor y was the greatest cash spend for the company in 2019. Farfetch invested signif icantly in acquiring companies that performed digital ser vice solutions, such as e-commerce solutions and distribution or fulf illment ser vices.

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50 PART FOUR

Contents

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Section 1: Marketing Analysis

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Section 2: Strategic Recommendation

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Section 1: Marketing Analysis

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Contents

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Product One: E-Commerce Platform

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Product Two: Browns Fashion

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54 Product 1: E-Commerce

Overview

“

Farfetch Limited is the leading global technology platform for the luxur y fashion industr y. Farfetch began as an e-commerce marketplace for luxur y boutiques around the world. Today, the Farfetch Marketplace connects customers in over 190 countries with items from more than 50 countries and over 1,200 of the world’s best brands, boutiques and department stores, delivering a truly unique shopping experience and access to the most extensive selection of luxur y on a single platform.

”

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Product 1: E-Commerce

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Age possesses a signif icant impact on the demographics of the Farfetch consumer due to its luxur y positioning. Generally, the older the consumer, the greater their f inancial stability and thus, their discretionar y income and spending power. While the general luxur y industr y experiences a consumer base under the age of 40 of only 58%, Farfetch has a consumer base that is signif icantly under the age of 40 at 70%. Farfetch’s online platform appeals to a much younger audience that is more comfortable with online luxur y spending.

General Statistics: GENDER: Mostly

female shoppers, but inclusive.

INCOME: $150,000+ SOCIAL*: Upper

class, with some upper-middle EDUCATION*: College-educated,

often with advanced degrees.

DEMOGRAPHIC analysis

AGE: 25-45

HOUSEHOLD*: Multi-income

households, often with children.

*discussed further in psychographic/behavioral sections

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58 Product 1: E-Commerce

1. Europe, the Middle East, & Africa 2. Asia Pacif ic 3. The Americas

Traditionally, the US provided a large portion of global luxur y sales, but e-commerce f irms like Farfetch are increasingly seeing these purchases moving to the Asian Pacif ic region, specif ically in China and Japan, as this area becomes increasingly wealthier and wealthier.

GEOGRAPHIC ANALYSIS

While Farfetch ser vices over 190 countries on a global scale, the company breaks down their top 3 segments into separate business divisions as:

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60 Product 1: E-Commerce

psychographic analysis

While the repeat Farfetch customer lives a luxur y lifestyle, there is the obvious younger than 40 crowd that often splurges for a special bag or garment here or there. Farfetch tends to market to this clientele - showing off their range of products that appeal to the jetsetting, boutique-hotel and -experience seekers that make up their market.

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Product 1: E-Commerce

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Farfetch focuses on providing their customers with specialized offerings from a multitude of designers, boasting an enormous catalog of over 5.7 million SKUs, over ten times that of their nearest competitor. The Farfetch consumer shops for something unique and different, browsing online for this variety. Farfetch utilizes its marketing insights to provide better, more personalized offerings from customer to customer, which is exactly what this demographic is looking for.

WHO are we empathizing with?

What do they need to DO?

- Fiind items that

speak to them What do they need to do differently?

What job(s) do they want or need to get done?

Co omplete their Wha. t decision(s) do they need to make? wardrobes How will we know they were successful?

Who 1s the person we want to understand?

What is the situation they are in?

What 1s their role in the situation?

- Th he end customer - De eciding what to purchase - Th he total purchasing decision

frustrations, and anxieties?

needs, hopes and dreams?

What do they SEE?

What do they see in the marketplace?

What do they see in their immediate environment?

What do they see others saying and doing?

What are they watching and reading?

- Anxiety and - Need exhaustion with customization, politics and its security online, What d;o they HEAR? potential effects trust in brands What are they hearing others say? on finances What are they hearing from friends?

- Personalization What are they hearing from colll eagues?

- Tired of the - Luxury experiences Wl1at are they hearing second-hand? pandemic

- Frriends spending on personal services and goods - Sp peaking about finances to a degree as they feel the need to show their purchases - Se ee and hear of some businesses struggling

Q What other thoughts and feelings might motivate their behavior?

- Find it challening to discover new brands online as they love finding something special, different, new, and exclusive to feel better than their peers.

last updat�d on 16 July 2017. Down!oad a copy,of this canvas at http://gamt!storming.c:om/empathy-map/

What do they SAY?

What have we heard them say?

What can we imagine them saying?

- Want to enjoy their time and money, but may hesitate to be showy now and afraid of financial repurcussions

0

What do they DO? What do they do today?

What behavior have we observed?

What can we imagine them doing?

- Willing to spend $ on personal styling esire to feel special - De - Want personalize ed recommendations, special styling sessions, and brands they love

behaviorial analysis

- Bu uy items that match their style, • Multitude of e-commerce budget, and closet options - Re eviews and repeat o Friends = WOM (word-of-mouth) purchases reviews - Wearing and buying luxury goods they THINIK and FEEL? What do , - Desire to keep up with news, finance, local G:AINS !PAINS issues, and politics What are their fears, What are their wants,

- Brrowse online some, but do not necessarily have the patience for it - Prrefer in-person to try and feel the product - Will buy if looking for something specific © 2017 Dav@ Gray, xp1 1ant!.com

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64 Product 2: Broiwns

Browns was purchased in the 1970’s by Joan and Sidney Burstein from Sir William Piggot Brown. At a time when there were no multi-brand boutiques in the UK, Joan Burstein and her husband Sidney bought the f irst of f ive Georgian townhouses on South Molton Street and changed the course of retail and fashion histor y in the UK. They were known for their pioneering spirit, introducing many now-famous fashion brands to fashion lovers for the f irst time – this is a spirit which still exists today.

Overview

An iconic British fashion and luxur y goods boutique. Browns operates two retail stores in London, and also leverages applications on their platform. Browns enables Farfetch to understand the luxur y fashion ecosystem through the lens of a boutique. Browns also ser ves the critical mission of pioneering innovations developed under Farfetch’s Augmented Retail strategy, including providing a luxur y fashion boutique environment to test Store of the Future technology.

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Product 2: Broiwns

66

The local UK/London-based luxur y consumer for Browns is older than the Farfetch customer, generally a female shopper despite the availability of men’s fashions, a member of the upper class with high-level tastes that expects the best ser vice, at an income level of over $200,000, owns a home or f lat in the London municipal area, and is almost always college-educated.

General Statistics: GENDER: Mostly

female shoppers, but inclusive.

INCOME: $200,000+ SOCIAL*: Upper

class.

EDUCATION*: College-educated,

often with advanced degrees.

DEMOGRAPHIC analysis

AGE: 35+

HOUSEHOLD*: Multi-income

households, often with children.

*discussed further in psychographic/behavioral sections

67

68 Product 2: Broiwns

GEOGRAPHIC ANALYSIS

While Browns does have an online presence, this is not the main revenue driver for this business. With two locations (approximately 30 minutes from each other as evidenced in the map to the left) in the central city area of London, Browns caters to the aff luent UK customer that lives and/or works in the city center. Partnering with Farfetch on Store of the Future technology and other innovative efforts, Browns provides its customers with a signif icantly-differentiated merchandise assortment that appeals to the fashionforward customer of the area that needs something new, different, and special.

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Product 2: Broiwns

70

Browns Fashion’s customers tend to be slightly more conser vative than that of their parent company, Farfetch’s online consumers in regard to not only political leanings, but also adoption rates of new technologies (such as Farfetch’s online shopping) and new ideas.

Despite this, they are ver y fashion-forward and appreciate luxur y goods and new fashions that will differentiate them from their peers.

psychographic analysis

71

Product 2: Broiwns

72

Luxur y consumers in the UK tend to purchase at department stores, or even that department store’s website - showing that Browns is in a strong position moving forward with this consumer in the locations that they are ser ving. Another key behavioral indicator is that of specialization and desire for the personal touch that Browns’ associates can provide through clientele ser vices such as personal styling, exclusive and unique designer offerings at their locations.

GOAL

WHO are we empathizing with?

Who 1s the person we want to understand?

What is the situation they are in?

What 1s their role in the situation?

- British luxury consumers - Cu urrent pandemic and political situations with Brexit at the fore - Secondary role

- Easy pick-up

- Virtual offerings What do they need to do differently?

What job(s) do they want or need to get done?

- Find WHERE to Wha. t decision(s) do they need to make? shop locally How will we know they were successful?

- Reviews and repeat purchases

- Political tensions and stores closing up shop - Local boutiques offering more they THINIK and FEEL? What do , personalized services G:AINS !PAINS and desiring of their What are their fears, What are their wants, needs, hopes and dreams? frustrations, and anxieties? time/money What do they SEE? What do they see in the marketplace? o Decreased What do they see in their immediate environment?

- Financial situation - Need financial spending What do they see others saying and doing? with potential security and trust What are they watching and reading? changes - Specialization - Brexit - Quarantine to be - COVID-19 over

What are they hearing others say?

What are they hearing from friends?

What are they hearing from colll eagues?

Wl1at are they hearing second-hand?

- Lots of politics day-in and day-out with discussions around conservatism/populism - Uncertain economic impact of Brexit - Recommendations from friends on brands and places to shop - Wanting differentiation

Q What other thoughts and feelings might motivate their behavior?

What have we heard them say?

What can we imagine them saying?

- Tired of being cooped up and want to spend personalized time at a store to feel special

0

last updat�d on 16 July 2017. Down!oad a copy,of this canvas at http://gamt!storming.c:om/empathy-map/

What do they SAY?

What do they DO? What do they do today?

What behavior have we observed?

What can we imagine them doing?

- Appointments and one-on-one shopping with friends - Spend more when purchasing in-store versus online, as they are wary of this experience

- They want special, personalized service - New brands to discover - Exclusives - Still want to shop in-person with attentive service

Š 2017 Dav@ Gray, xp1 1ant!.com

behaviorial analysis

What d;o they HEAR?

What do they need to DO?

73

Section 2: Strategic recommendations

74

Contents

*

Competitive Analysis

76 78 84

SWOT Analysis

Final Recommendations

*clickable topics click page numbers throughout document to return to contents

75

Competitive Analysis

$$$

76 local global

$

PROBLEM STATEMENT

VALUE PROPOSITION

Farfetch offers a wide variety of designer goods from over 50 countries and 1,300 designers, ser vicing over 190 countries across the globe. Farfetch’s platform solutions provide e-commerce and technological capabilities to help their brand and boutique partners access the worldwide marketplace.

POSITIONING STATEMENT

With more than ten times the SKUs than their closest competitors, Farfetch provides the ultimate discover y experience for their customers desiring to f ind something new and different than what they see ever y day in street fashion.

Farfetch needs to determine the right technological utilization to continue to ser vice the personal needs of their customers. If Farfetch fails to do this, there is potential for rising competitors to f ill the gap.

During challenging economic times, differentiating is a top priority to put Farfetch ahead of its competitors.

By utilizing their platform, Farfetch possesses the greatest potential to deliver these ser vices.

77

A lack of inventory due to Farfetch’s business model keeps the firm in a beneficial Balance Sheet position.

SWOT ANALYSIS

Signif icantly larger portfolio compared to competitors in regard to sheer number of SKUs. Digital platform and other e-commerce solutions provide Farfetch the upper hand in handling the current f lock to e-commerce markets.

Farfetch has not performed at a profit since inception in 2007 despite being “on guidance” per strategy.

Larger percentage (30%) cut to Farfetch from partner brands and boutiques may provide an opportunity for competitors to undercut.

78

STRENGTHS

Farfetch also depends upon its boutique partnerships to provide the inventor y to the brand’s customers. Without these partnerships, Farfetch would not be in the position it currently is.

WEAKNESSES

The Asian consumer market is growing exponentially, providing a signif icant opportunity with Farfetch’s integration with JD.com.

OPPORTUNITIES

Utilizing the learnings from operating the Browns boutique business, Farfetch has a great opportunity to further leverage its Store of the Future concept.

The global luxur y market continues to grow year-over-year despite challenging times.

With digital, Farfetch is at a great advantage.

Innumerable competitors with potential to disrupt Farfetch’s market through phygital strategies.

THREATS

Continued challenges from varied world powers as the Chinese market gains prominence and potential for disaster looms in the form of Brexit.

Consumers are demanding more and more personalized ser vices, seeking them not only from Farfetch, but its competitors as well.

79

SWOT ANALYSIS

Backed by the collective strengths of the luxur y conglomerate Richemont, YNAP has major advantages in regards to resources.

YOOX has been the major player in digital e-commerce in recent histor y, powering all of Richemont’s e-commerce offerings as well as providing solutions for brands within competitors like LVMH & Kering.

Like other digital platforms, there is less opportunity for direct interaction with customers as there is a lack of physical connection.

Signif icant divide between the men’s and women’s businesses, with men’s under the brand Mr. Porter, may be a point of confusion.

80

STRENGTHS

YNAP holds its own inventor y and thus has a greater commitment in assets with less available cash.

WEAKNESSES

Great potential to maximize the market in China with Richemont’s prior experience marketing brands in this region.

OPPORTUNITIES

Growing men’s, children’s, home, and beauty categories puts YNAP in a good position to capitalize on their strengths.

THREATS

As YNAP is owned and operated by Richemont, there is potential for competitors to remove items from their platform. Kering did just this as it announced it would be operating its own e-commerce solutions.

Like Farfetch, YNAP is vulnerable to competition undercutting their business model. Brands such as Farfetch and Zalando are able to move faster without the oversight of a large name like Richemont Group.

81

Great Customer Relationship Management (CRM) operations throughout its businesses.

SWOT ANALYSIS

Strong prof it position with consistently growing results as the company also expands. This position provides Zalando a great foundation to launch further market expansion efforts.

STRENGTHS

Signif icant market share in German, Austria, and Switzerland - generally eastern European area & maintains a sizable interet in the rest of Europe.

Zalando does not invest as highly in research & development as some competitors, especially in the case of Farfetch, which would potentially allow for these competitors to outperform.

WEAKNESSES

82

Notable increase year-over-year in trade payables and other liabilities, combined with an increase in debts on the Balance Sheet show a reliance on debt versus equity f inancing of the business.

Zalando recently acquired body-scanning technology company, Fision, and can utilize this technology to better ser ve customers in sizing.

OPPORTUNITIES

Expanding strong e-commerce operations on a global basis by capitalizing on retained prof it capacity.

Zalando can employ its strong balance sheet to leverage further growth in its business in expanding market share.

Despite great advantages in market share in Germany, its home countr y, and other EU countries, Zalando does not have the same global presence as competitors.

THREATS

No presence in the growing Asian, specif ically Chinese, market. With this luxur y market expected to grow exponentially over the next few years, Zalando is in a dismal postion to even compete.

83

Recommendation one

Personal shoppers

84

Luxur y consumers today demand a personalized, ser vice-based experience from any and ever y luxur y experience that they pay for. Finding the answer to this with an online, e-commerce based platform would provide Farfetch a new differentiator to further expand their market share.

Personal shopping is an in-demand ser vice for luxur y shoppers both in-store and as the need for differentiated ser vices increases, this type of offering has been made popular by bricksand-mortar dependent retailers to continue their businesses. For Farfetch, this could mean developing an internal conicerge ser vice team to assist customers in real-time on the site, provide virtual shopping/showroom experiences, and even integrate with their Browns store locations.

Recommendation one

85

Recommendation two

phygital solutions

86

While e-commerce solutions have increased revenue streams for Farfetch and numerous competitors, the physical experience for retail and luxur y especially is still ver y important for this consumer market. Expanding more signif icantly into this space through utilization of their Browns Fashion business and pairing it with their Store of the Future initiative would be a great way to start.

Currently, Browns has a traveling pop-up that may be testing different markets for this exact potential, but an increased focus on integrating this experience with the overall Farfetch online marketplace would give the brands a leg upon the competition. Also, combining it with the previous recommendation to provide personalized customer ser vice would round out Farfetch’s solutions in this space to answer the needs of their consumer base.

Recommendation two

87

Recommendation three

leverage assets

88

With considerable increasing investments in assets including property, plant, and equipment; intangible assets; and other technologicallydriven acquisitions, Farfetch is in a great position to better leverage its assets to produce better prof itability results. While the f irm is “on guidance� to be prof itable in 2022, there are numerous scenarios that could easily throw this plan off as we have seen with the coronavirus pandemic (despite this having truly helped Farfetch’s revenues), a bad surprise is just around the corner.

Farfetch should move to a slower growth objective as they have already signif icantly impacted their market share in well-performing areas such as China, the US, and Europe. Moving to a prof it position instead of hemorrhaging cash through continuous development will put the brand in a great position to continue growth in the future.

Recommendation three

89

90 presentation

Strategic Analysis Project | Bryan Kaetz

91

Contents Farfetch Over view

93 96 99 102

First Recommendation

Second Recommendation

Third Recommendataion

92

Discussion Topic What do you know of Farfetch and what is your initial feeling of the brand?

93

Introduction 2007: Founded by Jose Neves 2008: Off icially launched in Europe and Portugal, where it is headquartered 2010: Secured $4.5 million to expand to Americas 2015: Store of the Future opens, utilizing Augment Reality technology 2015: Acquired Browns, luxur y bricks-and-mortar store

2019: Acquired New Guards Group, owner of Virgil Abloh-led Off-White

94

2018: Initial Public Offering, raised $885 million with 33.6 million shares

2020: Scores exclusive digital partnership with Fenty

- Boutique dependency - Potential for undercutting

WEAKNESSES

- Operating loss

OPPORTUNITIES

- E-Commerce prominence

THREATS

- SKU Count

STRENGTHS

- Balance Sheet

- Asian market - Store of the Future - Growing luxury market

- Phygital competition - Brexit - Customer loyalty

95

Personal shoppers

- As e-commerce continues to grow, platforms like Farfetch need differentiated offerings - Real-time assistance on web, VR shopping/showrooms, integrate with Browns stores

96

Recommendation One

- Today’s luxury customers demand a special & personalized experience

GOAL

WHO are we empathizing with?

Who 1s the person we want to understand?

What is the situation they are in?

What 1s their role in the situation?

- British luxury consumers - Cu urrent pandemic and political situations with Brexit at the fore - Secondary role

What d;o they HEAR?

What do they need to DO?

- Easy pick-up

- Virtual offerings What do they need to do differently?

What job(s) do they want or need to get done?

- Find WHERE to Wha. t decision(s) do they need to make? shop locally How will we know they were successful?

- Reviews and repeat purchases

- Political tensions and stores closing up shop - Local boutiques offering more they THINIK and FEEL? What do , personalized services G:AINS !PAINS and desiring of their What are their fears, What are their wants, needs, hopes and dreams? frustrations, and anxieties? time/money What do they SEE? What do they see in the marketplace? o Decreased What do they see in their immediate environment?

- Financial situation - Need financial spending What do they see others saying and doing? with potential security and trust What are they watching and reading? changes - Specialization - Brexit - Quarantine to be - COVID-19 over

What are they hearing others say?

What are they hearing from friends?

What are they hearing from colll eagues?

Wl1at are they hearing second-hand?

- Lots of politics day-in and day-out with discussions around conservatism/populism - Uncertain economic impact of Brexit - Recommendations from friends on brands and places to shop - Wanting differentiation

Q What other thoughts and feelings might motivate their behavior?

What do they SAY?

What have we heard them say?

What can we imagine them saying?

- Tired of being cooped up and want to spend personalized time at a store to feel special

0

What do they DO? What do they do today?

What behavior have we observed?

What can we imagine them doing?

- Appointments and one-on-one shopping with friends - Spend more when purchasing in-store versus online, as they are wary of this experience

- They want special, personalized service - New brands to discover - Exclusives - Still want to shop in-person with attentive service

Š 2017 Dav@ Gray, xp1 1ant!.com

last updat�d on 16 July 2017. Down!oad a copy,of this canvas at http://gamt!storming.c:om/empathy-map/

Analysis

97

Reasoning $$$

local

98

global

$

Phygital Solutions

- Utilize Browns and Store of the Future tech to integrate with Farfetch platform - True omnichannel through melding of various Farfetch solutions for a seamless customer experience

Recommendation Two

- The physical experience for luxury is still important despite growing e-commerce

99

Analysis

100

Reasoning

101

- Farfetch has still not been prof itable since inception in 2007 due to growth strategy.

102

- With a signif icant market share, Farfetch should lower growth objectives to focus on leveraging assets for prof it.

Recommendation three

- With signif icant debt utilization, Farfetch has acquired numerous assets, incuding PPE, intangibles, and technologies.

103

Reasoning

104

Key Takeaways - Strong balance sheet but weak asset leverage - Potential for competitive disruption due to nature of e-commerce - Prominent in luxury due to important partnerships

Final discussion What do you think of the recommendations and how could they be improved upon?

105

References

106

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Buchholz, K. (2019, May 21). Chinese Consumers Drive Global Luxury Market Growth [Digital image]. Statista. Retrieved October 05, 2020,

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