London-based fashion technology group Farfetch will merge its Chinese business with the ecommerce platform run by internet giant JD.com, as it looks to tap into a growing trend among the country’s consumers to buy luxury goods at home.
JD.com invested $397m in Farfetch in 2017, but continued to run its own luxury ecommerce platform. Now the companies see greater value in joining their operations under the Farfetch brand, with JD.com handling logistics.
“Both parties came to the conclusion that it was better to merge into one single consumer-facing brand,” said Farfetch founder Jose Neves in an interview.
Chinese consumers are responsible for about a third of luxury purchases globally, according to consultancy Bain. Most of those purchases are made overseas, but domestic sales have grown rapidly due to reductions in import taxes. In China, online sales account for about a tenth of luxury sales. Bain estimates the global luxury goods market was worth €260bn last year.
“There is a trend towards repatriation of luxury spending, which is a massive opportunity for the luxury industry. If even a fraction of overseas purchases are repatriated it’s a multibillion-dollar opportunity,” Mr Neves said.
The merger, which Mr Neves said would be completed by the end of this year, will create a selection of luxury brands larger than its main rival Alibaba’s Tmall Luxury Pavilion, which has signed up about 80 brands including Valentino, Burberry and Versace.
Some prestige brands such as Gucci have expressed reservations about appearing on Alibaba’s and JD.com’s platforms because of concerns over the presence of counterfeit goods. Mr Neves said that brands would be consulted before being listed on JD.com’s website.
“Of course we will listen to the brands and we will consult them about their presence on this new channel,” he said. “We will offer brands the option not to be on the platform, but our recommendation is to be on it.”
When JD.com became one of Farfetch’s largest shareholders two years ago, it was seen as a gateway for the UK company to transform its operations in China. The deal was part of an effort to expand its global reach as it moved towards an initial public offering.
Farfetch listed in New York last September and reported a loss after tax of $156m in 2018, though revenues rose 56 per cent year on year to $602m. The company said Chinese spending including the integration with JD.com would cost $60m this year.
“Whilst in the short term this represents a shift in our previous plans in terms of path to profitability in 2019, investing in China and this landmark acquisition is the right thing to do and will lead to further growth in 2020 and beyond,” Mr Neves told investors following fourth-quarter results.
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