How did Farfetch Leverage Network Effects to Become One of the Leading E-commerce Platforms for Luxury Fashion?
How did Farfetch Leverage Network Effects to Become One of the Leading E-commerce Platforms for Luxury Fashion?
A Deep-Dive into the Farfetch Marketplace Evolution and Flywheel Effect
When Farfetch launched in 2008 as an e-commerce marketplace for small boutiques around the world, it encountered opposition from the most notable luxury fashion houses. Today, the same brands sell on the Farfetch Marketplace, which connects customers in 190+ countries with products from 50+ countries and 1,400+ brands, boutiques, and department stores. We analyse how network effects contributed to Farfetch becoming a top luxury e-commerce platform despite initial scepticism.
Network Effects and Critical Mass
As a marketplace, Farfetch acts as a virtual connector, matching brands (supply) with shoppers around the world (demand) and overseeing all aspects of the digital trading experience. For two-sided marketplaces to scale a powerful phenomenon, called “network effects”, needs to take place.
“Network effects refer to any situation in which the value of a product, service, or platform depends on the number of buyers, sellers, or users who leverage it”
In the case of Farfetch, the more customers, luxury boutiques, and brands it attracts, the more attractive the platform becomes for all parties.
Network effects kick in once marketplaces reach an inflection point, after which growth follows an exponential trajectory. This is known as “critical mass.”
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For Farfetch, it refers to the point at which it had amassed a large and active user base, attracted significant investments, and reached a level of recognition that allowed it to become a dominant player in the market. While it's challenging to pinpoint an exact date for this achievement, two early key milestones in Farfetch's history marked its growth and influence:
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2015: Farfetch achieved a valuation of $1 billion, earning it the status of a "unicorn" in the tech industry. This signified it had already attracted a substantial user base and significant investments, marking its presence as a major player in the e-commerce landscape.
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2018: Farfetch went public and was listed on the New York Stock Exchange. The initial public offering raised $885 million, which indicated strong investor interest in the company, and that it had achieved a certain level of scale and recognition.
Additionally, in August 2022, Farfetch and Richemont announced a deal: Richemont agreed to sell a 47.5% stake in Yoox Net-A-Porter (YNAP), a luxury e-commerce rival, for over 50 million Farfetch shares, with an option for full acquisition in 3-5 years. This move aimed to boost Farfetch's luxury e-commerce standing, potentially adding $3 billion in gross merchandise volume by leveraging YNAP’s brands and widening Farfetch’s product range.
Growing the network
When it comes to network effects, marketplaces are usually subject to the chicken-and-egg problem: to attain a critical mass of buyers, a critical mass of suppliers is required — but attracting suppliers requires a significant buyer base. Since its inception, and for the initial five years of its existence, Farfetch faced strong resistance from most luxury fashion houses regarding e-commerce. Therefore, Farfetch strategically prioritised building a reputable supply of luxury goods. A growing assortment from luxury brands would not only attract customers seeking high-end fashion but also entice other luxury brands to join in.
“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.” – José Neves, Founder
Over the years, Farfetch scaled with presence in new markets, strategic partnerships with brands like Richemont, and acquisitions such as Browns and New Guards Group. It also began to build up its platform solutions business, offering a compelling and easy logistics service to some of the biggest luxury brands, starting with Jason Wu in 2015.
What are the main supply drivers helping Farfetch grow its brand and product list?
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Value proposition: Farfetch helps independent multi-brand boutiques around the world compete online without the upfront development costs and hassle of establishing, managing, and promoting their own e-commerce websites. Through Farfetch, these boutiques can sell their curated inventory to global audiences and markets that would otherwise be impenetrable. Farfetch also offers its online services to brands, who can easily outsource its pre-existing e-commerce operations through API-based integrations.
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Venture investment: Farfetch’s rapid growth, fuelled by strategic funding rounds, allowed for expansion into new markets and investments in technology and people. With a strong financial model featuring robust unit economics, no inventory risk, and low working capital requirements, Farfetch attracted over £700M of investment in its first 7 years. Key investors like Advent Venture Partners, Felix Capital, Condé Nast International, and JD.com helped build its reputation with brands and investors.
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Consistent shopping experience: Although Farfetch doesn’t own its merchandise, it offers a seamless customer experience by providing a centralised customer service, consistent product imagery, descriptions (as it handles all photography), and branded packaging. These features ensure a reliable shopping experience that is easily replicated globally.
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Building relationships and trust: Founder José Neves pioneered ‘Gatherings’ with boutiques and brands to cement Farfetch’s relationships with these key partners, fostering a stronger sense of community. This initiative provided the opportunity to meet with owners, explain the development of the Farfetch platform, and gather valuable feedback.
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Farfetch Platform Solutions: Farfetch offers a compelling proposition to luxury brands, providing them with access to a set of tools and services that facilitate and enhance their online selling experience. It includes features like seamless inventory integration, support for powering independent e-commerce websites, and collaborative relationships with brands. In fact, brands have control both over what they want to sell on the marketplace and on pricing, avoiding discounting that could damage their high-end image.
The Marketplace Flywheel
This model shows how the Farfetch marketplace works, particularly focusing on the demand side of the network. Customer experience improvements are leveraged to consistently drive traffic, improve the selection of goods and cost structure, decrease prices, and contribute to the flywheel spin.
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The Flywheel gains momentum through improved customer experiences, aiming to deliver the right products at competitive prices for an optimal shopping experience.
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This enhances customer engagement on Farfetch, increasing conversion rates for existing customers and, consequently, boosting retention, repurchase, and average order value – ultimately improving overall customer lifetime value.
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By focusing its digital marketing investments on customer acquisition campaigns, Farfetch funnels prospective consumers through the two initial stages of the AISDA funnel (Attention, Interest, Search, Desire, Action). It captures their attention and interest with compelling ads on paid social channels such as Google.
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Providing users who land on the website with a rewarding digital experience and a wide range of fairly priced items boosts overall sales, attracts new customers, deepens the loyalty of existing ones, and enhances global brand awareness.
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A growing and loyal customer base, coupled with increased Farfetch brand recognition, attracts prominent boutiques and brands to the marketplace. This enriches the platform with a broader, prestigious product offering supported by various digital tools and operational services.
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As increasing supply alone does not guarantee customer acquisition and loyalty, Farfetch strives to continuously deliver exceptional customer experience. Its digital product "shopkeepers”, who oversee product search, discovery, and inspiration, continue to create products users love based on insights from user behaviour, experience, and AB testing data. As prospects go through the Search, Desire, and Action phases of their shopping journey, the product consideration and checkout process are improved to further increase the odds of converting them into customers. Finally, its exceptional after-sales experience aims to generate positive feelings and word of mouth so that one-time customers can become loyal ones.
Final Take-Aways
Like many other companies with two-sided marketplaces, such as Uber, Airbnb, and Cult Mia, Farfetch's network effects are driven by its ability to attract both buyers and sellers to its platform, creating a mutually beneficial environment where the more users that participate, the more valuable the platform becomes. Farfetch’s success can be attributed to its strategic approach in building a robust network, fostering both supply and demand drivers, and consistently improving the customer experience to maintain a leading position in the luxury e-commerce market. However, since its IPO in 2018, Farfetch has been experiencing a declining performance and share value which raises important questions on its growth and expansion strategy: has it reached its limit of growth? Where can Farfetch go from here, and should it go back to focusing on its core marketplace? Only time will tell…
References
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Robb Report, How Jose Neves Became the Most Powerful Man in Fashion
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Farfetch Tech Blog, The Farfetch Marketplace Flywheel Driven by Customer Experience
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Indigo 9 Digital, 7 Ways Farfetch Is Disrupting Luxury Retail
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Luiss University Thesis, Disruptive Innovation in Luxury E-Commerce: The Case of Farfetch
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Business of Fashion, Report: Farfetch in Talks to Take the Company Private
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Tech Crunch, Fashion Marketplace Farfetch Raises $86M Led By DST At A $1B Valuation
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GQ, Farfetch Wants to Be the Netflix of Fashion
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Business of Fashion, Can Farfetch Survive Coupang's Shock Therapy
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WWD, Farfetch Bond Holders Take Fight to Cayman Island Court
Recent updates:
Since its 2018 IPO, Farfetch has experienced a steep financial decline, with shares plummeting over 80% from a peak of $73.40 in February 2021 to $2 in November 2023, as many expansion efforts faltered. 2023 was particularly challenging, marked by a declining sales and significant struggles across its various divisions. New Guards Group, responsible for licenses like Off-White and Palm Angels, saw a 40% year-over-year revenue drop in Q2 2023. Additionally, Farfetch closed its beauty division in August 2023 due to shopper attention challenges and is divesting Violet Grey, a cosmetic retailer acquired for $50 million in January 2022, to enhance its beauty ambitions.
Farfetch’s acquisition binge expanded its scale; however, this growth has led the company to deviate from its initial vision as a fashion tech platform. This serves as a cautionary tale for entrepreneurs navigating substantial funding, underscoring the critical importance of maintaining focus on the core mission and vision amid rapid expansion. Consequently, some investors argued that Farfetch should prioritise revitalising growth in its core marketplace, streamline its white-label e-commerce services, and consider divesting its New Guards Group unit.
“The fashion industry and the financial markets no longer understand the company’s increasingly complex vision and have little faith that the company, which has never consistently made a profit, can get back on track.” – Imaran Amed, Founder & CEO, The Business of Fashion
In December 2023, Coupang, a South Korean e-commerce giant, announced the acquisition of Farfetch for just $500 million, following Farfetch’s reported liquidity of over $800 million four months prior. Disgruntled investors holding Farfetch’s convertible bonds have filed a suit to liquidate Farfetch Limited, aiming to recover $404 million in losses.
Just two weeks after the acquisition closed, in February 2024, Coupang announced a massive executive shake-up, including the departure of the marketplace’s founder, chairman and CEO, José Neves, along with several other key executives such as the CFO, CPO, COO, CMO, and the chief fashion & merchandising officer who’s also the CEO of Browns. The executive streamlining signals a company repositioning for financial strength, but Farfetch’s future under Coupang’s ownership remains uncertain, disrupting already strained relationships in the fashion industry. Neiman Marcus Group is terminating its commercial partnership with Farfetch, which involved re-platforming the Bergdorf Goodman website and app via Farfetch’s Platform Solutions software. Additionally, Kering is withdrawing all its brands, such as Gucci, Saint Laurent, Bottega Veneta, Balenciaga, from the Farfetch marketplace.