The Farfetch Crisis Has Revealed That Overactive M & A Is Not A Good Thing.

After Farfetch acquired Off-White's parent company New Guards Group last month, its share price hit a new low. Investors are not satisfied with the business models of Farfetch development, overactive mergers and acquisitions and disappointing profits.

To be sure, the founder of Farfetch Jos Neves and the team did quickly establish the most extensive and convincing luxury fashion network. They choose wisely to cooperate with third party retailers first, rather than direct contact with luxury brands. These brands have resisted electronic commerce for many years, until recently they realized the strategic value of digitalization.

Farfetch has found an opportunity for development through multi brand buyer shops: luxury brands have neglected wholesale distribution for years, focusing exclusively on direct retail channels. Farfetch's many independent buyer's shop signs were loud and brilliant, but they encountered an increasingly complex and competitive market. However, by working with global distribution platforms such as Farfetch, they will be able to take advantage of the local market. Therefore, Farfetch can quickly establish a retailer network and assemble a large number of brands.

This allows Neves and the team to deliver convincing information to the brand: we purchase your products and sell them from your wholesale customers. Why do you not directly supply us? This will more effectively control the brand image and save a lot of money. You can sell half off to the traditional wholesale customers, or you can give them to us. For some brands, this seems to be a natural opportunity, especially for those who are lagging behind in online direct distribution. Prada, for example, has been late in e-commerce, and has been keen to take advantage of fast growing channels, but lacks its mature network platform. Joining Farfetch can promote its brand high-end line and increase profits.

But Farfetch seems to be a wise God giving opportunity to some industry people.

　　 1. independent multi brand retailers may earn little or no extra income through Farfetch.

Taking into account the average conversion rate of more than 30% of the platform, which is likely to include a very small commission for major players, it is quite reasonable to say that some of the promotional discounts, some of which are jointly funded by retailers. As a result, many of the smartest independent multi brand retailers have decided to sell the explosive money to the store for direct sale, and only upload the uncertain styles to Farfetch. Therefore, the image and feel of the platform are not as striking as its direct retail competitors.

　　 2. big names may start to wonder if it's a good idea to help the fashion industry create a winner take all platform.

Farfetch aims to become a luxury platform similar to Uber. This is attractive for Farfetch and its shareholders, but the rest of the industry should be concerned. For example, big names have gotten used to getting better conditions from shopping centers or shopping malls in China. This situation is very stable. However, the preferential terms obtained from the winner take all platform may not necessarily last. Once the platform becomes too big to go around, it can create new rules for the brand that it has helped. These terms will be far from the terms reached by brands and other partners such as the best shopping center in Chengdu. If Kering, the parent company of Gucci, owns shares in Farfetch, then Gucci can cooperate with Farfetch to help its success. We can understand that, but this is not the case.

3. smaller brands have already felt the rain coming to the floor.

Farfetch has no longer removed duplicate products from cooperative wholesalers recently, and has implemented more stringent price terms and distribution controls. Recently, Farfetch has often stopped its geographic pricing control. Luxury brands often sell products around the world at different prices; their official sales websites match the prices of local stores. When Farfetch's wholesalers sell products to customers in the US or Asia at European prices, the sales volume of the official sales websites in these areas will drop sharply, because local customers will rush to buy Farfetch at thirty percent off or twenty percent off of their prices. At present, because of the relatively weak bargaining power, the second tier brand has already happened. But with the development of Farfetch, can bigger brands be immune?

Faced with these challenges, Farfetch is overactive in mergers and acquisitions, and its latest transaction, the acquisition of New Guards Group (NGG), seems to imply a change in its business model. The $250 million acquisition of Stadium Goods is bundled into the niche market, and the $50 million acquisition of Jingdong luxury platform Toplife is supporting regional expansion. But buying New Guards for $675 million is quite another matter.

New Guards has bred many of the best selling brands of luxury street wear, including Virgil Abloh's Off-White. Moreover, in theory, the acquisition will allow Farfetch to build its own brand platform and launch, test and expand its brand through it. But why does the market need to believe that Farfetch has the ability to create brand when its core business is online distribution? Less than a year after initial public offerings, management should focus on achieving their vision of selling. What is the reason for the acquisition?

Farfetch's latest earnings report has not given any confidence. Earlier last month, Farfetch announced a disappointing profit and said that fierce competition and huge discounts had dragged down its growth. Why does Farfetch plan to slow down its total value (GMV) growth rate, but the post market acquisition (Stadium Goods, Toplife) aims to boost GMV?

Ironically, Farfetch mentioned in the earnings report that the frequently promoted retail environment is one of the reasons why it can get more promotional resources. Our analysis shows that Farfetch has always been the leader of promotional games. There is a problem: promotional activities will certainly contribute to the rapid growth of Farfetch, but because of the lack of geographical pricing principles, they have conflicts with many brand partners (and their original multi brand stores). Farfetch can not afford to hate the main brands, especially when the brand is rapidly reducing wholesale, and the idea that the market will not pay much attention to promotion in the next few quarters sounds more like hope than plan. Therefore, Farfetch must abandon the idea of establishing a winner's eating platform at the lowest price.

But this is related to growth. Mature growth must go hand in hand with more optimistic prospects for profit. So it is not surprising that markets react poorly to prudent GMV growth guidance and cowardly earnings forecasts.