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Farfetch still dreams of dominating the luxury segment under new owner Coupang

Farfetch is still chasing the dream of being a global luxury platform.

But under the auspices of Coupang, who saved the company from bankruptcy last month, Farfetch has also become something of a side business of a larger organization focused primarily on building its e-commerce businesses in South Korea and Taiwan.

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Bom Kim, founder and CEO of Coupang, outlined part of his vision for the luxury platform during a conference call with analysts, which also discussed Coupang’s fourth-quarter earnings update.

“While we did not pursue an acquisition, we identified a rare opportunity to purchase an industry-leading $4 billion (gross merchandise value) service with a $500 million investment,” Kim said. “We hope that in a few years we will be talking about how Coupang has transformed Farfetch into a company that has transformed the luxury fashion customer experience while providing strategic value to Coupang. Today is too early for this conversation. Even if all this potential is not fully realized, we are confident that it will prove to be a prudent financial decision. We are already implementing a plan that will make Farfetch self-financing without additional investments beyond the announced capital commitment. We see many ways to make this investment valuable for shareholders.”

“We remain focused on our biggest priority,” he said. “We have a very small share of the retail markets in Korea and Taiwan. Each of these opportunities is enormous, and exploiting them remains by far our greatest prospect and priority.”

Adapting to life within Coupang is the latest change for Farfetch in the whirlwind of events.

At least externally, it started in August, when Farfetch completed its ambitious move into the beauty sector. Although the company claimed at the time that it would have $800 million in cash on hand by the end of the year, CEO and founder José Neves instead sought financial rescue and found Coupang.

Neves stepped down earlier this month, and Farfetch’s luxury dream has now passed to Kim.

Analysts have complained for years that Neves has been lured away from Farfetch’s core luxury market business by a series of acquisitions and growth initiatives.

Now Kim faces the same doubts and makes it clear that he knows what Coupang is really focused on.

It helped that investors liked what they saw in the company’s financial results, and the e-commerce company’s shares rose 10.4 percent to $18.65 in after-hours trading on Wall Street.

For the full year 2023, Coupang’s net income was $1.4 billion, and the bottom line was driven by a non-cash increase of $895 million resulting from tax reserve adjustments.

Revenues increased 18 percent to $24.4 billion, including $21.2 billion from retail sales.

Time will tell how Coupang will deal with Farfetch.

Bokyung Suh, an analyst at Bernstein, analyzed the Farfetch deal in a research note before Coupang released its results and suggested it would be difficult for the South Korean e-commerce company to acquire top luxury brands.

“Despite Coupang’s aspirations, there are serious challenges ahead. “Coupang’s adoption of a ‘vertical’ strategy in key markets is broadly similar to taking a ‘mini Amazon’ approach,” the analyst said. “Luxury brands, including Tier 2 and Tier 3, are hesitant to partner with Amazon due to the potential cannibalization of their lower-cost direct distribution channels by higher-cost third-party distribution. That’s why prominent companies like Kering have made the decision to stop supplying inventory to Farfetch.”

It is clear that the season of change at Farfetch will continue for some time. However, the analyst said all this could likely lead to another shift in the spotlight for the luxury platform.

“If Coupang can significantly address Farfetch’s inefficiencies – e.g., by reducing its workforce by 50%, reducing marketing spend by 30%, spinning off underperforming business units, etc. – we estimate that Farfetch could achieve break-even (earnings before interest and taxes) by 2026,” the analyst said, speculating on the future of the business. “This could potentially lead to a re-listing on the (New York Stock Exchange). “This mirrors the history of Naver’s acquisition of Poshmark, where acquiring a struggling company may initially appeal to short-term investors but could prove to be a profitable deal for turnaround specialists.”

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