From Hype to Hurdles: Farfetch's Battle for Attention and Loyalty

As inflation is slowly cooling down, many companies have begun to slow down their price increases or keep them relatively constant. But for most luxury brands, prices have been (and STILL are) doing the exact opposite. In fact, they’ve been increasing even more rapidly, and almost too much so. For example, Hermés increased its prices by 7% over the last year. And the result? A whopping operating margin of 42% — a new record. In fact, the average price of products in the luxury industry skyrocketed by over 64% within the past 5 years. But why?

To understand the reasoning behind these price increases, we first have to understand what makes luxury, luxury. And it’s clear that at the center of it all, exclusivity is a major component of any luxury good or service. To make a product or service exclusive, it should be a) limited in supply and b) difficult to acquire. Because the supply for luxury goods is typically very limited, demand often surpasses supply, and as a result, prices continue to shoot up.

And a lack of exclusivity is exactly why Farfetch, an e-commerce space for luxury brands, didn’t perform nearly as well as expected.

Farfetch’s Downfall

Just a few months ago, Farfetch, which had gone public in 2018, went private after being acquired by Coupang, an e-commerce giant. Farfetch desperately needed help recovering from over $1.15B in debt, and Jose Nevés thought that under less pressure from investors and by leveraging synergies from the acquisition, Farfetch might be able to make a comeback. But even with all the resources Coupang would be able to offer, recovering from the enormous valuation decrease of 23.7 billion would be pretty difficult to do.

The downfall of Farfetch is typically attributed to the company’s rapidly rising costs and high cash outflow that outweighed their revenue and cash inflow. But at the core, there were two main problems that heavily contributed as well:

2. Merchants were difficult to lock down

One challenge was that most luxury brands were quite apprehensive toward putting their products on display alongside thousands of other luxury products. The top luxury brands are where they are now because they’ve managed to lock in a loyal fanbase of customers and deliver an exclusive, personalized experience to each and every consumer. Many of these brands believed putting their products on another site would only hurt their sales and brand image.

If you just took a quick look at Farfetch’s website layout, you would see that they line up all the products on their website in a way that takes away from the uniqueness of each brand, making them all look the same. It gave brands very limited control over the way they would like to display their products and personalize individual customer experiences.

In the luxury space, the top 5% of customers make up over half of brands’ sales. So it doesn’t make sense for a luxury brand to make a distribution decision that would not only affect the reputation they had worked so hard to build up, but also take away a hefty chunk of 30% from each sale.

2. Customer loyalty and acquisition were lacking

Farfetch struggled to create a value proposition that would encourage shoppers to move to their platform instead of buying directly from the brand. Customer surveys showed that 6/10 Farfetch users are loyal customers. While this might be high in retail, it certainly is quite average for the luxury industry. For companies like Hermés and Louis Vuitton, the rate of customer loyalty is over a whopping 70%.

And when you think about it, this difference actually makes a lot of sense. If most customers in the luxury industry are loyal to one or two brands in particular, why would they even need to browse an e-commerce platform full of similar brands? A platform showing hundreds of designer products would likely just diminish the feeling of exclusivity that customers value so deeply. So while customer loyalty wasn’t horrible but also wasn’t great for Farfetch, finding and converting new customers was also a pretty big struggle for the brand.

Takeaway

So, in order for a business idea to succeed, you can’t just rely on finding and filling up an empty space in a niche. You HAVE to consider the feasibility of acquiring and retaining customers long term AND figure out a way to provide value to your customers in a way that other brands can’t replicate. But don’t worry — tools (like Cotera) certainly exist that can equip you with everything you need to do EXACTLY this.

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