Farfetch builds a strategy to overcome market scepticism

José Neves starts each day with Buddhist meditation. “I’ve been meditating since I was 13 years old, when I wasn’t coding,” says the founder of Farfetch, an online marketplace for luxury fashion. “Neither of these made me popular at school.”

Neves, now 47, launched Farfetch two weeks after the collapse of Lehman Brothers in 2008. He began with a handful of programmers and operations staff in a cramped office in London’s Clerkenwell district.

The company gained traction by first wooing small boutiques in need of an online presence, then, when it reached critical mass, using its scale to attract brands such as Chanel.

Farfetch is now a global business, listed on the New York Stock Exchange, with more than 5,400 employees and in excess of 1,300 sellers, but there have been bumps in the road.

London remains Farfetch’s base but there are now large offices in Neves’s native Portugal, as well as in China, Italy, Brazil and the US. In 2018 the company launched an initial public offering in New York, trading at 42.3 per cent above the offer price on the first day and valuing Farfetch at more than $5.8bn.

Then in August 2019 Farfetch announced the $675m acquisition of New Guards Group, owner of upmarket streetwear labels such as Off White, to form the basis of an own brand platform that would nurture new labels sold exclusively through Farfetch’s marketplace. The announcement sparked a sell-off, with the share price plunging 40 per cent in a day.

Neves admits he did not at the time do a good enough job explaining the strategy — which he likens to Netflix moving into producing original content. “It is our role to communicate,” he says.

When Covid-19 appeared, investors balked at a retail business offering a non-essential product. The share price, which had hit $28.45 on its first day of trading, tumbled to $7.05 in March 2020.

“I experienced all the emotions you would expect, from surprise at the reaction of the markets to disappointment in us that we hadn’t been able to pass on the right message,” Neves says.

“For me it was then about moving from that emotional state of ‘OK this has happened, it was disappointing, it was not what we expected’, to ‘what do we do about it?’ ”

We are talking inside Farfetch’s headquarters, a glass tower in Old Street overlooking Silicon Roundabout.

Neves has arrived in a cab from his home near Regents Park, carrying an iced coffee from Starbucks as the office kitchen is still out of bounds.

We don’t exist to please shareholders. But our responsibility is to be very humble and explain to our shareholders, listen to them and then do what is right

“We only reopened this office last week,” he says, adding that all employees have been retained and have worked from home throughout the pandemic. This includes the staff at Browns, the fashion boutique that first opened in Mayfair in 1970, and which Farfetch acquired in 2015.

“We have always said the biggest problem for us is attracting talent, so we do not want to lose people,” he says. “But we have not furloughed anyone and we have not claimed any benefits from government to pay them. We didn’t even have to cut bonuses. I am very happy that thanks to the efforts of everybody in the company we could afford to do that.”

Back in 2019, the building was packed as employees gathered to hear Neves update them on the controversial New Guards acquisition. All Farfetch staff were made shareholders at the IPO and Neves hosts a town-hall meeting after any market announcement. This one was particularly well attended, he says.

“Communication at such moments is very important and the message was very clear: we don’t exist to please shareholders. But our responsibility is to be very humble and explain to our shareholders, listen to them and then do what is right.”

He believes that the reaction, or rather lack of action, by employees — almost all held on to their stock rather than selling it after the New Guards announcement — was proof that the message was the right one. “I think people were galvanised. They said, ‘Let’s prove the short sellers wrong.’”

After addressing the workforce, Neves went to explain the strategy to the portfolio managers of one of his largest shareholders, T Rowe Price.

“At the end of the meeting, one of these PMs led us to the door, which is very unusual,” Neves recalls. “He said, ‘listen, I can’t remember any company that did this. When this happens, normally people bury their heads in the sand, they disappear. And we were surprised that you wanted this meeting. We were curious. What is he coming here to say? That was really good. That makes us believe even more in the company.’”

There was also a strategic reason for the meeting. “It served us again to keep calm,” Neves says. “Our reaction was, let’s take a deep breath. We have the trading data hourly. Most important of all, our decision was to support the creative community.”

In March 2020, as the global pandemic took hold, Neves gathered his senior team together to create a campaign for small businesses selling luxury goods, with the slogan #supportboutiques.

It launched a month later, with Farfetch offering free deliveries for its client retailers from the company’s six regional distribution centres plus an advertising campaign using the #supportboutiques hashtag.

The recovery in luxury sales in the following months more than offset any costs from the campaign, Neves says, as well as building goodwill with Farfetch’s global customer base.

Revenue in 2020 was up 60 per cent at $1.67bn, although the pre-tax loss ballooned from $372m to $3.35bn due in large part to big writedowns on a convertible note hedging structure. Neves says growth this year, driven by the luxury market growing online, will enable Farfetch to record its first full-year profit in 2021.

The company also strengthened its position at the end of last year with a $1.1bn investment from Chinese ecommerce business Alibaba and the Swiss luxury goods group Richemont.

Farfetch is also gambling that bricks and mortar stores will still remain vital for luxury goods sales. In April this year Browns opened a new flagship store in London, mixing cutting-edge technology, such as augmented reality in the in-store mirrors so you can view yourself wearing clothes for sale, with a luxurious refit.

“There is still a place for physical retail, but we digitise it,” Neves says.

The opening of the new Browns store reflects London’s cachet as a base for luxury brands, although the growth opportunity for Farfetch lies in China, while its capital comes from the US markets.

“We are staying in London,” Neves says. “Obviously the UK leaving the EU has made it a lot more difficult with visas and work permits for people we hire from other parts of Europe. But London is an amazing city and it doesn’t take much to convince people to come from elsewhere to live and work here.”

He expects to create more jobs this year because the pandemic has left Farfetch in a far stronger position. “What we said would happen in the course of three, five, maybe seven years has been compressed into a much smaller period of time,” Neves says.