Updated: Apr 5, 2021
Although the luxury goods industry has not yet reached that stage in online maturity, that could be a reality sooner than people expect. Chances are none of our readers have ever bought from or even heard of the luxury good platforms Farfetch, MyTheresa, Cettire, and TheRealReal (if you have please reach out). These companies are taking the luxury goods market online. This is a peculiar industry as the luxury goods market is designed for the personal tailor-made experience. Walking into a high-end boutique store, one gets the ten-star experience from personal customer service to incredibly ornate wrapping etc. Over the last ten years, however, as younger generations have gained purchasing power, the internet is becoming a legitimate medium for the luxury industry as it gives customers greater breadth and curation of goods than retail stores.
Luxury goods make an interesting marketplace due to how different the attraction points are from typical marketplaces. Unlike Amazon in which price and shipping times are the main selling points (they are also the main way amzn shares economies of scale with its customers) luxury goods operate in almost the opposite fashion. Being a Veblen good, typically demand goes up with increasing prices, lowering the price of a Rolex to a hundred dollars would irrevocably damage the brand and demand would plummet. The main selling points of an online luxury marketplace will come down to primarily two factors:
1. Breadth of offering
Breadth of offering is existential as that is the main advantage an online presence has versus a physical one. This comes from thousands of brands whose goods an online marketplace can make available. The breadth of offering incents customers to use the platform. However, with more breadth, it is paramount that the shopping experience remains relevant and pleasant. The only way to achieve both is to have curation that is highly tailored to the customer. One cannot be assailed by every available style out there- less is more.
The luxury goods market has been growing at a modest 6% clip for the last twenty years and is estimated to be about a 500B global industry. The illustration below from Cettire’s prospectus shows the luxury goods market has about a 15% online penetration with an estimated 30% penetration by 2030.
Thus far, the evolution of the online luxury market has yielded two primary marketplaces with perhaps another one developing. The larger marketplace is composed of companies such as Farfetch and MyTheresa. These marketplaces generally source their goods from brands directly and curate and sell them on their website. The other marketplace (eg theRealReal) is a consignment one. They source their goods from previous owners and have fulfillment centers to verify the authenticity of said objects. These items are anywhere from 20-80% off the original retail price. Online luxury consignment is an industry we will take a closer look at in the future. The rest of this article will be primarily on Farfetch, the dominant premier luxury goods marketplace and a much smaller competitor, Cettire, based out of Australia that recently IPO’d in December (the primary reason we started looking at this industry).
Farfetch (NYSE: FTCH) was founded in 2007 by Jose Neves. FTCH has about five thousand employees and started out as a marketplace for brands to list their items. FTCH is now leveraging its large consumer following to act as a “runway” for newer brands to premier on and to advertise. FTCH also offers design, production, fulfillment, and analytics along with other services. Thus, a boutique firm in Zimbabwe can grow their brand and get millions of eyeballs all on the FTCH platform when that would have been almost impossible to do before.
An illustration of FTCH’s marketplace economics is shown below. Essentially FTCH splits the margin that would have gone to the retailer/wholesaler evenly with the brand. A win-win for both parties. FTCH’s brand platform is more of a SAAS offering, analogous to fulfillment by amazon on steroids.
So who are these consumers that are willing to spend almost 700 dollars per order? Surprisingly, almost seventy percent of them are millennials making around 120k per year. The other thirty percent are above the age of 45. The lion’s share of the revenue comes from North America. Fun fact, the number of millionaires in the US (20mm) is more than 4x that of the next country, China. However, China is quickly becoming the number one source of demand and by 2025 will account for 40% of global spending on luxury items. Chinese appetite for luxury is enormous, creating industries such as daigous. This is essentially reselling of luxury items that were disguised as personal purchases at the border. Luxury items in China are much higher priced due to a myriad of tariffs and fees. Recent partnerships with JD and Ali Baba put FTCH in an ideal position to cater to Chinese customers.
FTCH has been dominating the online luxury goods market for the last decade, growing at about a 50% CAGR for the last 5 years. Surprisingly in 2020, revenues were up almost 70% to 1.7B. Its platform services revenue, introduced in 2018, was up almost one hundred percent. 2020 and COVID illustrated FTCH’s dominance, other platforms such as MyTheresa grew at about 1/3 of its pace off a much smaller revenue base.
Cettire (ASX:CTT) is a younger and much smaller company (around 400 mm USD market cap) founded in 2017. Unlike FTCH, it is already profitable and has grown at a 500% CAGR albeit off a small base. It is a much leaner-run organization with its website built using Shopify Plus and it only has about 40 employees. CTT’s revenue and customer growth are shown below.
Before one gets too excited, gross revenue is more of a GMV metric, CTT's annual revenue is closer to about 40mm. CTT holds no inventory and connects customers with wholesalers and retailers, acting as an aggregator. This is a departure from FTCH’s business model which connects customers with brands directly and also handles fulfillment. These connections give Cettire an advantage in terms of pricing over FTCH, primarily due to access to discounted inventory. We sampled over twenty items in proportion to their revenue contribution, and on average CTT was about fifteen to twenty percent cheaper than FTCH. This is most likely the main advantage of Cettire over FTCH as it attracts the more “price conscientious” customers, who probably make up a decent portion of the luxury good customers.
Looking at thewaybackmachine- an internet archive- one can see that in 2019, Cettire was the 16th most successful Shopify store, in November 2020 it was ranked third, and it currently is now the #1 store on shopistores. What is interesting is that this is without heavy social media spending. Since its inception, Cettire has spent roughly five million dollars on marketing spend, a small sum. Given their recent IPO and a 40mm cash balance, we expect more aggressive marketing to expand their brand presence.
Given its extremely low cost base, growth rate, and profitability, is CTT too good to be true? There are a couple of yellow flags such as almost the entirety of the exec team being hired in Oct 2020, presumably to IPO. The only veterans of CTT are the CEO and the more senior commerce associates. The company does not have a small army of engineers like FTCH. There was an interesting write-up on Cettire’s business model written recently. The author believes Cettire’s business model is semi-legal at best and exploits legal loopholes. There are certainly credible items to the article. However given Cettire’s business model is not undercutting anybody and acts as a pressure valve for wholesale and retail inventory, we don’t ascribe a lot of risk to their business model collapsing overnight due to a complete shutdown of their supply. The following points also give credibility to their business.
1. Share lock up
The CEO (Dean Mintz) owns more than 50% of the company and the majority of his shares are locked up for another two years. If the motive of the IPO was to get rich, there would be no such restrictions on his shares. The shares in escrow are shown below.
2. Why IPO?
If Cettire’s business model is to exploit some legal loophole that brands have to suffer, then remaining private would enable them to conduct their affairs longer, why IPO? Going public and having to file disclosures would run counter to Cettire’s long-term prospects. Curiously enough CTT mentioned this as a risk in their prospectus (shown below), whether it is a legitimate risk or a disclaimer remains to be determined.
Mentioning publicity, as of Feb 2021, Cettire partnered up with AfterPay, one of the largest Buy Now Pay Later companies. Cettire is mentioned as one of their recent partners on their website.
This article is different than our previous write-ups as it is more a cursory look at the growing online luxury goods market and the players rather than a valuation. FTCH and CTT are both fascinating companies in this space. FTCH is the gorilla in the industry and we expect that its dominance will continue while CTT occupies more of a niche which we expect to also persist. We will write more on Cettire as the next couple of quarters play out and their business model is tested. We expect its growth rate to be even higher in 2021 given a high-profile partnership with AfterPay, increased marketing, and new initiatives such as free shipping.
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