Farfetch’s Fall: Luxury Online Retailer Faces Financial Struggles

Summary

  • Founded in 2007, online retailer Farfetch provides high-end products, including a $5,690 Saint Laurent wool coat and a $5,900 De Beers white gold diamond necklace.
  • Lately, it’s offered up to 45% markdowns on attire and accessories from smaller brands including Diesel, Balmain, Lanvin, and Balenciaga.
  • However, the company’s shares dramatically fell over 50% on 28th November when quarterly earnings report release got postponed.
  • Repercussions escalated on a Tuesday as Moody’s downgraded Farfetch’s credit rating further into “junk” zone and placed it under review for a potential additional cut.
  • More powerful brands such as Chanel, Hermes, LVMH’s Louis Vuitton and Dior control all aspects of their product selling, thus presenting Farfetch and similar businesses with a long-term challenge.
  • Changing distribution trends leave the retailer reconsidering a sale and even considering going private, according to reports.
  • Currently partnered with JPMorgan and Evercore, the company is also contemplating diversifying its products base.

The Fall of Farfetch

One of the rare global online retailers of high-end items, Farfetch, established in 2007, offers a wide range of labels such as a $5,690 Saint Laurent wool coat and a $5,900 white gold diamond necklace by De Beers.

Of late, Farfetch has publicized discounts of up to 45% off on clothing and accessories from various smaller brands like Diesel, Balmain, Lanvin, and Balenciaga.

Deeper into ‘Junk’

After the announcement of the delay of its quarterly earnings report, the company’s shares plummeted by over 50% on Nov. 28 while adding that previous financial guidance “should no longer be relied upon”. Following this, Moody’s downgraded Farfetch’s credit rating further into the “junk” area and set it on review for another cut due to its worsening financial position.

Challenges and Future Prospects

The woes of Farfetch extend beyond economic impediments hampering the demand of aspirational shoppers for new fashion. Its ongoing challenge is the push from labels for enhanced control over their products, majorly at their own retail boutiques, to avoid discounts third-party retailers have to rely on.

This strategy for better control is led by top brands Chanel, Hermes, LVMH’s Louis Vuitton and Dior. Meanwhile, Burberry is focusing on reducing the number of third-party retailers and enhancing its boutiques.

Push for Diversification

Farfetch started diversification strategy in 2019 by acquiring brands and licences to distribute them, like streetwear label Off White, through the procurement of New Guards Group.

It extended a licence deal to distribute Reebok products in 2022 and ventured into the beauty sector by acquiring Violet Grey.

However, a decrease in luxury product demand in China and the US made it tough to make a profit. Critics suggest that the business became overly complex over time.

As per Olivier Abtan, a consultant from Alix Partners, when a retailer faces sales pressure along with profitability issues, the temptation to raise discount levels might surge. This, however, could become a vicious cycle.

The future performance of Farfetch as an online marketplace of luxury goods could have significant implications on trading, potentially impacting the stocks of luxury brands and retail-oriented assets.

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