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Morningstar | Farfetch Is Gaining Market Share in Fast-Growing Online Luxury Market

Farfetch is a leading global online distribution platform for personal luxury goods. It connects luxury buyers and sellers and offers a wide selection of products to consumers (3.9 million stock-keeping units at the end of 2017, or 10 times more than the next biggest peer, according to the company) without exposing itself to unsold inventory risk. While we believe Farfetch’s business model exhibits traces of a network advantage moat source, we are currently wary of assigning it a moat, given the early stages of industry development, the company’s small size and reach (3% share of the online luxury goods segment, reaching less than 0.5% of the luxury buying population), and lack of business model monetization. Although the online luxury space is still relatively fragmented (biggest player YNAP commands around 10% share), we believe it will be dominated by a limited number of strong global players. Still, we think there is a low probability that any one player will dominate online distribution, given the market power of the big brands and their reluctance to depend on a single party for online distribution. But neither should the space be too fragmented, in our view, given that the brands are wary of overrepresentation in too many channels, with risk of brand trivialization, excess inventory, and discounting. We believe Farfetch has potential to become one of the strong players in the industry, given its value proposition to the brands (better economics than wholesale and control over inventory and pricing retained), retailers (which are engaged in the supply chain rather than competed with), and customers (through vast choice of products and unique items). We believe Farfetch is well positioned to take advantage of strong growth in online luxury good buying, which we expect to increase from 10% of total industry sales in 2018 to 30% in 2028. We expect Farfetch to increase its market share from 4.6% in 2017 to 9% in 10 years’ time, bringing its total revenue growth to 23% on average over the next 10 years. We forecast the company to turn profitable by 2023 and reach a 16% margin by 2028 as operating expenses are scaled against growing revenue.