Will Farfetch or Secoo Win in Luxury Ecommerce in China? (Tech Strategy – Podcast 38)

In this class, I talk about the difficulty of moving luxury into ecommerce. And how Chinese consumers will likely determine who finally cracks this problem. Secoo and Farfetch are two companies that are on this frontier right now.

You can listen here or at iTunes, Google Podcasts and Himalaya.

Question: Will Farfetch or Secoo win in luxury ecommerce in China? Three factors to consider:

  1. What do consumers care about most?
  2. What do large luxury brands care about most?
  3. What do small luxury brands and boutiques care about most?

Related podcasts and articles:

This is part of Learning Goals: Level 4-5, with a focus on:
  • #26: Advanced and Complicated New Retail

Concepts for this class:

  • Platform Business Models: Marketplaces for Products and Services
  • New Retail
  • Online Merge Offline (OMO)
  • SMILE Operational Marathon: Ecosystem Shaping and Management
  • China Digital Consumer Network (CDCN)

Companies for this class:

  • Farfetch
  • Secoo
  • JD


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the topic for today, the question for today is will Farfetch or Siku win in luxury e-commerce in China? Or more generally will Farfetch or Siku figure out how to make luxury work in e-commerce everywhere? Because it really is kind of a big question, how do how do transition luxury to e-commerce? And China is sort of the center of that question. And these are two companies that are really targeted on that. So we’ll see if one of them or both of them crack it. And if they do, I think it’ll be a huge win. So that’ll be kind of the case for today is which of these companies do you think is going to do the best? Who’s going to possibly win this very large sector? Now before we get started, a little bit of administrative stuff for those of you that are members, subscribers to the class. I have basically gone through and completed the first six levels. Now I mean the way this works is you sort of join depending on where you are in your expertise you might start at level one, level two, and it goes up to six levels and each level has about five learning goals. So overall we’re at about 25, well there’s really 25 learning goals at this point. and they sort of build on each other and build on each other. And if you get through all six levels, which is really, I think, a good place to bookend the foundation for all of this thinking, that will put you in great shape. So that has all been redone in the last week. So if you go online, you can see the six levels laid out. And I mean, I recommend that’s the path. And I’ll push you to keep moving upwards and moving upwards and getting better and better. And the objective is for you to dramatically increase your expertise over time by being a member and a subscriber. So take a look at that if you get a chance, see where you are in the level, and I’ll keep sort of pushing you to sort of advance and advance. Another thing, I have been reaching out to several of you over the last week trying to get feedback, sort of fix things, what sucks, what’s good, why does login, people seem to not like the login process. So… I’m doing another wave of that, so if I’ve reached out to you, thank you for your feedback. If you have feedback and you’d like to talk about it, please just send me a note. You can reach me at jtowson at towsongroup.com or through the website. And yeah, I’d be happy to talk to you and hear what you think. What’s good? What’s bad? What should we do more of? What should we do less of? Things like that. It’s all very, very helpful and we’ll keep doing that. Okay, and for those of you who aren’t members… You know, please sign up. You can go over to jeffthousand.com. There’s a free 30 day trial, so it doesn’t cost anything to try it out. See if you’re making any progress. And anyways, welcome to do that over at jeffthousand.com. OK, let’s get into the case. Now I’ve laid out 25 learning goals within sort of six levels, and this is really the foundation. It’s sort of your toolkit, which is why I spent quite a lot of time doing that. so that you have some tools you can draw on to start to take apart various companies and situations. Because it turns out, I mean, a lot of that was sort of generic basic stuff, like a marketplace platform, virality, things like that. But when you start to look at various businesses, you realize that they are quite different. And when you start to apply those, you realize this is kind of, it’s kind of like, I’ll make an animal analogy. It’s like talking about like, Big cats have claws or, you know, and okay, but that’s a very different thing. If you’re talking about lions or cheetahs or whatever, yeah, they’ve all got claws, but it’s a very different sort of situation. This is kind of the same and going forward, what I’m gonna start to do is go into more and more specific cases. And I will still draw on that sort of foundational toolkit, but you’ll find out it’s actually pretty different depending what you’re talking about. And today is sort of the first day of that where we’re gonna talk about luxury. And luxury kind of bleeds into fashion, but we’ll talk mostly about luxury. Because it turns out all these things we’ve been talking about, marketplace platforms, e-commerce, new retail, online merge, offline, all of that. When you start applying that to luxury, you realize it’s very different than selling refrigerators or buying food online or groceries. I mean, the dynamics are very, very different, even though the general concepts are the same. And we’re gonna start talking about those differences. I got into that a little bit with education a week or two ago, but we’ll start doing fashion, healthcare, e-games, live streaming, e-sports, things like that. And yeah, we’ll start to apply the same ideas, but you will see that they’re very different. And fashion is a good one. Fashion is a really good case for a couple reasons. Now, the key ideas for today, I’ll repeat these as we go through and I’ll ask you some questions and. As I ask you the questions, I’ll sort of encourage you to use these concepts as how to answer them. The first one we’re gonna talk about, one of the key concepts is marketplace platforms, which we’ve talked about before, but now we’re gonna apply that to luxury, which is different. We’ll talk about new retail and online merge offline, OMO. Again, that’s gonna be a big deal in luxury. And we’ll also talk a little bit about the China Digital Consumer Network, the CDCN, which I’ve talked about. And all of this will go under learning goal 26, which is gonna be called advanced or more complicated new retail. That’ll be kind of what this will all fit under. All right. Now, why is luxury such a big deal? Especially the digital aspect. Well, a lot of it has to do with the fact that it’s a lot of China. I mean, it’s China’s… one of the biggest consumer markets. It’s either one or two for a lot of businesses, cars, gaming, whatever. It turns out luxury is really a China story. I mean, you’re talking about, you know, the numbers get thrown around are 40 to 50% of all global luxury purchases are now made by Chinese consumers. And when we talk about luxury, we’re talking about handbags, we’re talking about watches, we’re talking about high-end apparel, fashion. I mean, That does kind of bleed into regular fashion. It does kind of bleed into, you know, other aspects of skincare beauty. But you know, usually people talk about sort of watches and stuff like that. Hire ticket items. Now within that, the numbers you always hear is China’s 40%, 40, 50%. Now you got to take that with a grain of salt because these numbers move around all the time. The demand really. bounces all over the place and therefore how much of China as a percentage really depends on what year it is, it depends what subsector you’re talking about. So this is a moving target this one. And I’ll give you some numbers on that. But generally China is the number one or number two market in the world for various consumer products and for luxury it’s a big, big deal. So here are some numbers. 40 to 50% of global luxury spending tends to be Chinese consumers over the last five years. Chinese luxury sales are in the ballpark of about $100 billion per year, so about $700 billion renminbi. However, about half of that spending happens in-country, people in China, and half are Chinese consumers traveling around the world. Those numbers tend to have a lot to do with various taxes of buying things back in China and exchange rates. Within this story, the young consumers are a very large percentage, typically 30, 35, that range. But it’s really not necessarily a story of high net worth individuals, although they are a big part. It’s sort of a upper middle class to high net worth demographic. but in the middle class, upper middle class, it’s just the frequency of purchases changes. But people do actually save up and then they buy something nice. They just do it a little bit more sporadically. So a nice niche, if you wanna do well in China with Chinese consumers, like the sweet spot of modern China is, what would they call, affordable luxury. where it’s perceived as luxury, but it’s not too far out of reach, like an iPhone would be an affordable luxury. They tend to do very, very well. That’s a great spot to be. Overall, that’s the current story, but what gets people excited, and which is why all the global brands are focusing on Chinese consumers for luxury, it’s the growth story that… Chinese consumers have accounted for about 50% of luxury spending growth over the past five years. And by 2025, here’s some numbers from L2 Gartner. L2 is the old Scott Galloway company. They have some pretty good numbers on China often. Sometimes, not always, but they’re a good place to keep your eye on. Their projection is that this $100 billion per year by Chinese consumers will go to about 175 billion by 2025. So Chinese consumers could account for maybe 60, 65, even possibly 70% of luxury spending growth over the next five years. So that’s, you know, as a result, big, big surprise that all the major luxury brands, the Gucci’s, the Prada’s, the Christian Dior, all of that, they’re all focusing on China. It’s a big part of their strategy. However, there’s always a however. It’s not that simple. Luxury spending tends to be very volatile, year to year, category by category. So let’s say we go back to 2018. Okay, luxury spending grew by about 20% that year, mostly driven by millennials and women in China. But we go back to 2015 and luxury spending was pretty flat. It was like one, 2%. Art auctions, which is kind of this crazy business in China, because there’s a lot of funny behavior in art auctions. That sector booms and busts like crazy. There’s a lot of fads, there’s trends. So all of this stuff bounces all over the map. Has a lot to do with the nature of luxury, the nature of fashion, but it also has to do with the fact that luxury spending tends to track a lot of external factors. Real estate and stock markets, you know, if they go up, there’s a greater perception of wealth that tends to enable spending. It could in fact impact overall wealth, but you know, it could impact perception of wealth. Consumer confidence matters, you know, when confidence falls, luxury spendings tends to fall pretty fast. The preferences and buying behaviors swing pretty good. The taxes and regulations, especially related to luxury imports in China are a big deal. Luxury spending took a pretty big hit a couple years ago in China because the government changed the rules on corporate gifting. This was like a big deal in China where you would give gifts to people as a company and there was often like expensive liquors and other things and when they changed the rules the luxury tech sector took a huge hit. So there’s all this funny stuff going on and an exchange rate so you got to kind of you know it’s a crazy sector. But underneath all of this sort of volatility, there is a tremendous sort of long-term secular trend. It’s truly the one I think about most, which is rising Chinese and Asian middle-class families, which are really, it’s really an urban story. I mean, that’s, I’m betting a half of my career on the rising middle-class families of China, Asia. They’re just advancing very quickly, very steadily, and you know. while it may bounce around year per year, if you look at just the overall upper middle class and high net worth individuals of, you know, China and other parts of Asia over the next five to 10 years, I mean, it’s as good a bet as I know of. So, but yeah, it’s pretty volatile. Okay, there is a problem with all of this, which is, you know, the sectors that went digital first, e-commerce, things like that. It was like books, laptops, consumer electronics, home appliances. But certain sectors were easier to do that with. And the Alibaba’s and the Amazon’s, they focused on the easy sectors for a long time and they kind of avoided the harder sectors. And around 2018, Jack Ma started talking about new retail a lot, that, hey, we’re gonna merge the online and the offline assets into one data-driven… consumer experience and the first iteration of that was groceries. Now, why did he do that? It’s one, it’s this idea of OMO, new retail, online merge offline. The other was it was clear that traditional e-commerce wasn’t going to work in grocery stores. And it was a sector that they all kind of avoided for a decade. There’s too many problems with that. There’s the perishable aspects. There’s the frequency. the wide variety of assorted items. And there was just a lot of problems. And the fact that, you know, your typical supermarket has very small margins. You’re talking about two or 3% operating profit. So there wasn’t a big opportunity to disrupt it anyways. So that got a lot of attention 2017, 2018. However, what didn’t get a lot of attention, at the same time, these major companies, Alibaba, JD, they also launched major initiatives in fashion and luxury at the same time. And pretty much for the same reason, because if there was another sector that had long been problematic for e-commerce, it was luxury and to a lesser degree fashion. You know, it had been resistant to it, the consumer, I’ll go through some of the problems with it, but I mean, just think if you’re Gucci or Prada and you’re opening these beautiful stores in the high-end grade A shopping malls. or your own standalone stores. And you’ve been telling this brand story forever to create this mystique around, we’re a Paris fashion house that’s been around and we have our fashion shows and we have all our commercials and our models. And you’ve been telling, weaving this emotional story that gets into people’s brains over decades. And then they come into your store and it’s beautiful and it’s the feeling and it’s exclusive and it’s aspirational. and you look at the new handbag that’s just been released and it’s the new fashion trend and you only want the new items, you only want this season’s fashions, you don’t want last year’s. You know, all of that. And then you buy it and you take it home in the beautiful bag and all of it. The salespeople are amazing and they’re really attractive and pleasant. Now all of that, how do you do that whole experience on a smartphone screen when you’re just a little thumbnail that’s, you know. centimeters high or like 10 millimeters high like at one centimeter. I mean how do you take that whole experience and just become one of 20 thumbnails on the screen of a smartphone? Right so the merchants and the brands have long resisted this whole idea. I mean they didn’t even have web pages for a long time but they don’t want to be a little icon on a smartphone screen that you know that really changes what they are so they have long resisted doing this. And there were a lot of problems. If you do decide to do this, there’s a lot of problems which I’ll go through. And they didn’t wanna do it, but one of the ideas for today is what I talked about before, the China Digital Consumer Network, which was my argument that Chinese consumers are basically digital first in their behavior and they’re connected. And they buy things on smartphones. That is where they begin. That is the whole process is on the smartphone. So if you have 50% of the global demand for luxury and maybe 60, 70% of growth by a demographic that lives on their smartphones, that is pretty much what broke the back of the luxury brands. And they said, okay, we’ve got to do this. I mean, they finally accepted, we’re going to start doing digital marketing, we’re going to start offering our stuff on these sites. But they resisted it forever. And I think it was really Chinese consumers that, you know. Look, they’re half the market and this is how they behave. So if you don’t wanna be in that market, God bless and good luck. So that’s kind of what’s happened 2017, 2018. We saw these brands begin to do lots of money on WeChat, digital marketing in China and start to take apart this question of how do you do e-commerce for luxury? And that’s really the topic for today. How do you do this and who’s gonna win? and the two companies will talk about are Siku and Farfetch, which I think are on the frontier of this question. So let me go into some of the problems with, you know, why has luxury been so difficult as a business model within e-commerce? So think if you’re trying to sell luxury goods via e-commerce, I mean, you can pull the financials of any of these companies and or pro their filings and just look at the risk section. Like the list section is a, it’s a stunning list of all the stuff that doesn’t work when you start to go online. Selling books online is easy, selling luxury products is very, very difficult. The first thing, well, I mean, depending who you are in this system, this is either really good news or really bad news. Probably the biggest factor is people still overwhelmingly. prefer to buy things, this is China, luxury goods in person, overwhelmingly. It’s like I gave a talk late last year at a conference of people who do luxury services, which is a lot of high-end travel, things like that. And basically my message was the same, like, is they’re all in the business of enabling these things and selling a lot of agents and stuff like that. And I was kind of like, look, this is the good news. A lot of this is going online, but overwhelmingly people prefer to purchase luxury in person, which is very different than, say, buying books where nobody cares. So now it has changed. They definitely go online for awareness, for interest, for learning. Social media is very, very important. Digital marketing is very, very important. KOL is hugely important. When it comes time to purchase, most people prefer to do that in person. And when you look at, you know, across all the ways a brand, let’s say a Gucci can engage, let’s say official brand channels, e-commerce, word of mouth, key opinion leaders, media, celebrity sponsorship, digital ads, traditional ads, all of that, the one that is bigger than all of them, pretty much put together is in-person experience at brand stores in terms of what influenced the purchase. So that in-store thing is really, really important in luxury in a way that it has fallen away. Like if you’re trying to sell CDs in a store, it’s really not a good idea. So that’s either good news or bad news depending on who you are. But for these companies that are trying to move online, that’s a big limitation. If you’re a merchant or a brand, this can be a good level of protection for you actually. So that’s kind of the number one issue here is luxury purchases may not happen online. Parts of the process are moving online, but a lot of it, especially the purchase, is still done in the stores. Okay, now let’s say when someone is gonna do the purchase, well, there’s just a list of problems. There’s a list of concerns consumers have. You lose the interaction with the salespeople, which is something they really do like. It’s really important. Go into a, I used to work on a Saks Fifth Avenue store when I used to work for Saudi Prince. And I know I’d work in the store and I’d look at everyone buying all the Christian Dior and Valentino and I don’t know, Tiffany jewelry and stuff like that. And it really was the salespeople that were the engine of the company. People love, and it wasn’t just that they were charming, they had long-term relationships with customers. And you know, whenever they had new products, you know, they would always call their customers personally. I mean, there’s a lot of that relationship, salespeople that happens. Well, you don’t have that online. You don’t have the ability to physically examine it, which is a big deal. When you’re talking luxury, you’re talking shoes, watches, and handbags. And then you’re also talking women’s apparel, but those are probably the big three categories, and then jewelry, obviously. You know, the ability to physically examine it is a big deal. Especially if you’re going to charge $800 for something that you could get online for 50 That looks kind of the same but it’s not until you touch it and feel it that you you can understand the distinction and why it might be better for you You could put all of this under the the title of experiential retail People like the experience as much as the product and it’s a core part of it When you ship this stuff there’s the issue of delays people don’t like to wait five days to get their luxury handbag. They want it right now. There’s a lot of returns and exchanges in this business, especially because these are very high priced items. I mean, you’re talking about 500, 800, $1,000 things. So returns and exchanges are problematic if you’re shipping them. You are pretty dependent on a small number of merchants and brands and suppliers. I mean, the numbers I was looking at for Farfetch, is 16% of their GMV comes from 10 retailers. I mean, people want Gucci. They don’t want lots of random handbags. So the brands have significant power, and there aren’t that many of them. The retailers and the brands, if you’re doing an online platform of some kind, they tend to want to set their own prices. They care about that a lot. That’s not something to give up. You’re generally reliant on third parties for fulfillment and delivery. That can really impact the experience. I went to see Top Life, which was the JD luxury platform. They had, you know, JD has all their e-commerce, but they started a luxury segment called Top Life. And I went to visit their warehouses outside of Shanghai. And I mean, this was a big issue for them was delivery and warehouses, because you go into their regular warehouse and it’s massive. I mean, it’s shelves to the sky, 15 levels high, forklifts moving all over. Then you go to the Top Life warehouse, and it was actually pretty small. I mean, it didn’t look very big. There weren’t that many items. It was just random watches on shelves. And instead of doing regular delivery, they had hired these mostly men, I think all men, in tuxedos with white gloves, who would drive these sort of sporty special cars, and they would deliver it in this car, and they’d come up and hand it to you personally. And it was sort of… trying to create the special aspect in the delivery. So you can see these sort of funky cars going around China every now and then. But yeah, the delivery aspect was a problem. If you’re selling online, like most online companies, you are sometimes very dependent on other sites to drive traffic to you. You’re dependent on social media, you’re dependent on search engines. You know, that is not how Gucci has built its brand by buying AdWords on Google. I mean, they’re very good at like getting the location in the mall, putting up billboards, things like that. So this idea of being reliant on other sites for traffic if you’re gonna drive it to your e-commerce is a problem. And then when you get to the China story, one of, if not the biggest concern is trust that products can be fake. They can be unauthorized sales. They can infringe on the IP of other brands. If you’re running a marketplace platform or just even a retailer, trust is a huge problem in China when it comes to luxury goods. And that’s something, if you listen to the CEO of Siku talk, he will talk about trust all the time, that you have to have authorized real products and people have to believe that’s the case. It’s a big, big deal. Another kind of chronic issue which is typical of luxury, but is being maybe accelerated when you move digital, is that if you’re running these stores, like when I used to do the Saks Fifth Avenue, one of the biggest challenges you always had was forecasting demand. Because people are very much seasonal, they want this season’s goods, they don’t want last season’s, tastes change very quickly. So if you’re running one of these stores, merchandise is a huge problem because you have to forecast demand, place your orders with the major brands to get the goods, and then you have to manage the inventory. And it’s really difficult. You know, you have to know what fashion trends are going to be hot. You have to ride the new product launches. And if you do it right, you have a very nice gross profit and some pretty good liquidity and working capital. And if you do it wrong, your GP, your gross profit takes a huge hit. Because literally the second you buy the merchandise from Milan and you bring it into your store and the season has begun, literally day by day the amount that you can charge for that inventory is falling. Such that six months later you can’t give that stuff away. You gotta give it to discount stores. So you’ve gotta pick the right items, move it fast. And if you do that you get a good gross profit, good working capital. If not… You have a high risk of inventory obsolescence. You have a decline in inventory value. You have write-offs. You have a lower gross profit. You know, it’s a really difficult problem if you miss that target, if you order the wrong stuff. And conversely, if you underestimate the demand, if you don’t have the stuff that people wanted, forget buying stuff that people didn’t want or it declined in value. If you don’t have enough of the stuff that they do want, that impacts your brand as a retailer. They get very frustrated. So it’s a very sort of narrow gap you have to manage there. And that has always been a problem with fashion. And a lot of the brands, you know, their power is in their ability to shape demand as much as, you know, to manage it. And it looks like digital is changing that, that it’s accelerating, and maybe your ability to shape demand and to shape fashion is increasing. not just by the merchants and the brands, but also by very influential consumers, are getting an increasing ability to shape the ecosystem of fashion or luxury, but also fashion. Okay, so that’s kind of a list of, yeah, this is difficult. It’s a difficult space to do e-commerce. And against this problem with China being the epicenter and really of luxury consumption and I think the frontier of taking apart luxury meets e-commerce. Let’s talk about how two companies have attempted to solve all these problems I just listed. Now the first company we want to talk about is Farfetch, a very interesting company and I mean the first takeaway is this is a platform business model. I mean that’s what they are. founded in 2007, 2008, come out of the UK. But they were, let’s do a marketplace platform business model, which we’ve talked about multiple times in this class. So, two-sided platform. On one side you have merchants and brands, on the others you have consumers. Okay, fine, we’ve talked about that. But as soon as you start to think about what that looks like, a couple things jump out at you. Like the first is, okay, it’s a marketplace, you know, one of the five types of platform business models I’ve talked about, but it’s global. I mean, most luxury brands, it’s not like a supermarket where everyone goes to the local supermarket, both the merchants and the brands and the consumers are kind of scattered around the whole globe. You’re not gonna sell a whole lot in Omaha, but you might have a couple of customers. And you’re not going to have a lot of luxury brands just in the US. Now, there’s going to be some in Japan. There’s going to be some in Europe. There’s going to be some in New York. I mean, it’s very scattered, fragmented, and it’s sort of global on the supply side and on the demand side. So, you know, when they founded this marketplace, they are, according to their numbers, in 190 countries. They have about 2 million active buyers. and they’ve got about 1200 brands slash boutiques slash sort of slash luxury retailers. So that’s not really very many brands. Like if you look at Alibaba and Amazon, you’re talking hundreds of thousands. This is a very small fragmented sort of interesting business, but it’s also very global. So that’s kind of the first thing that jumps out at you. And then they have all these issues I just mentioned. CICU has by and large stayed in the platform business, which means they’re in the business of connecting consumers with merchants and then taking a service fee or selling marketing services, but they’re not taking the inventory. Now, they have expanded out of this and they started to acquire their own personal, not personal, their own brands that they own. So they are somewhat acting like a retailer as well. They bought Stadium Goods, which was a… This was in 2019, premium sneaker and streetwear marketplace. They bought New Guards, which is a collection of brands. They do have some of their own brands. But when you look at their revenue and their business model, they’re overwhelmingly operating like a marketplace platform that also tends to own a handful of its own brands. But it’s actually quite small relative to other things. Okay, so we look at their revenue. They’ve been public for a long time. You can look at the last five years of their financials. And the picture is interesting. The revenue and GMV growth are both very, very fast. You know, year after year, 2015, 16, 17, 18, 19, 2000. I mean, they’re going up 30, 40, 50 percent every single year. So their revenue in 2015 was about 142. million, I think this is US dollars, but it could be great British pounds. Now they’re up to about a billion. And, you know, we see their GMV basically doing the same thing, going up 30, 40, 50% per year. We see the act, you know, the number of consumers they have, the GMV, the revenue, it’s all going up very, very quickly. And within that, the gross profit is spectacular, which is not uncommon for marketplace platforms, 45%, 50% growth profit off of revenue that’s in the billion dollars now. So that’s all great and that looks like you’d want to see a marketplace platform look. Within that, the average order value is about $600. So that’s luxury for you. I mean, the average order value on Amazon is not $600. Now, this is big purchases, relatively speaking. That number has been relatively flat for five years. It doesn’t appear to be moving. Then you get down to their operating profits and it turns out they’re losing money and they have been losing money perpetually. Last year is about $380 million or pounds, I should check that. I looked into that a little bit. It’s actually not terrible. This looks like a strategic choice or maybe struggling. with the nature of the business itself, the unit economics, but it’s not coming from buying customers. It’s not, we’ve got to do a lot of marketing spend to drive stuff to our traffic and blah, blah, blah. You know, the marketing spend, the customer acquisition costs are not bad. So a bit of a mixed picture in the financials. And I think that’s actually pretty symbolic of this whole luxury meets e-commerce question that it hasn’t quite been figured out. If you’re in this business, there’s a lot of demands on you in terms of returns, exchanges, all of that stuff. So the revenue growth is there, but we’re not seeing the profits yet. And those numbers I gave you, those are US dollars. Sorry, I had to pause and check that. Okay. So 2 million active customers, not bad. Most of the revenue is digital platform services. Fine, growing fast. This global aspect is interesting because when you start to think about this, one of the things that jumps out at me is you start thinking about the brand side of the equation a bit more. Like if you’re a brand selling on these platforms, how do you deal with them? Well, one of the things I think Farfetch has is they have a sort of very integrated global supply chain. They are able, they don’t have millions of warehouses all over the world, but they have a handful of them in the right cities such that they’re able to access all of the world’s… major luxury brands those 1200. So they have this the supply chain part I think is more interesting than normal. They have the marketplace model which is awesome which means you don’t need a lot of capital that’s always good. Now everyone loves marketplace models. You know they can offer a larger selection of luxury goods than you know a typical standalone brand site. You know product breadth of selection is always important on these online things. But they haven’t really solved the key question, which is this idea of how do you do experiential retail? They’ve got some strengths for short. They’ve got the marketplace platform model. They’ve got the global supply chain, that’s good. But this whole experiential aspect for consumers is not really solved. And then the fact that a lot of these brands are struggling with, look, they don’t really wanna sell online. They wanna tell their brand story. They wanna offer the experience. They wanna make people happy. Well, how do you do that through a website? So there’s a. those two big outstanding questions I think are floating. And then you have the rising Chinese consumer part and Farfetch has since partnered up with JD in China and they ended up taking over Top Life, which was JD’s luxuries, in-house thing. So that was a very good move. So they’re locked into China, okay? It’s a really interesting picture of strengths and weaknesses. So are they gonna figure this thing out? Are they gonna figure out how to do luxury online merge offline? in China, because if you can crack it there, I think that’s how you win this globally. Now compare that story to Siku, which is basically going after the same thing, but in a pretty different way. Now this is a Beijing-based company. It’s founded in 2008 by Zhao Hui Huang and Richard Li. You know, they’ve been mostly a retailer. You know, they do have a marketplace model now, which they launched in, I believe, 2014. but they’ve overwhelmingly acted like a retailer and they’re much more focused on the consumer experience and being close to consumers and having that relationship. And when you compare them, like let’s say you look at the head count, you’ve talked about 13, 1400 employees at CICU and about 4,500 over at Farfetch. The majority, you know, the biggest group at Farfetch is gonna be in IT and product development, but the majority in… CQ is going to be in sales and marketing. So they’re much more positioned on that front end dealing with the consumer. And when you, you know, if Farfetch is more about this sort of global supply chain, CQ is more about, look we have warehouses in Beijing and Shanghai, Beijing I think. And then we have maybe one in Milan, but you know they’re mostly a retailer. Well, they will take the order when they take the order then they will turn around and buy the good. and do direct sourcing and then bring it into the country and deliver it. And they have various ways you can do that by pay by installment and things like that. So they’re kind of like, they’re trying to own the consumer piece and then direct source as they need, which is, that’s not a marketplace business model. And when you look at their financials, they’ve been public for about three years, three to four years, their financials don’t look like far fetched. they look like a retailer. So, operating gross profit of 18%, 16%, 15% instead of 45, 50%, because they’re actually taking possession of the item and their inventory and their balance sheet shows all that. Although their revenue does look pretty good. I mean, their revenue is also growing at 45, 48% per year. They’re up to about 800 million US dollars, that’s 2018. So they’re in that range. about the same size, top line as Farfetch’d, but their gross profit is 15, 16, 17% like that as opposed to 45. And then you look at all their operating expenses and their total operating expenses are about 12, 13% against gross profit of 18. So you’re making three, four, 5% operating profit. That’s pretty standard for a online retailer. I mean, if you look at JD’s numbers, they kind of look the same for their retail business, not the marketplace one. And when you listen to them talk about what their priorities are, they’re always talking about the consumer experience. And the word they will use all the time is authentic, that we have authentic upscale products. They will also say stuff like lifestyle services, but they’re mostly a product company. So, authentic, upscale. What can we do? You know, we curate high quality goods that you can trust are the real thing You know watches bags clothing footwear. They’re doing some skincare cosmetics They’re kind of shifting for into more lifestyle type stuff, but they’ll talk about tourism sports events Convenience that we offer functionality and aesthetics. We have a strategically selected and curated catalog with good pictures and good product recommendations and lots of interesting product information that’s comprehensive, and that we tell a brand story and have good delivery options. I mean, they’re all about that consumer-facing aspect of the business. Increasingly, they’re talking about personalization. They’re talking about customization, flash sales. Things like this, auctions. So you can see they’re continually building it out. They have offered some offline experiences. They’ve opened seven to eight physical locations that you can go into and sort of do experiential retail, do returns, exchanges, things like that. So they’ve sort of got a foot, they’re getting close to OMO online merge offline. They’re getting close to new retail in the same way that Alibaba did it for supermarkets. and that’s where most of their focus is. They say they have 27 million registered customers, about eight million of them they would call registered members because they have membership programs. They have five levels, you can get exclusive benefits like coupons and discounts and birthday presents and you can get invited to events and you can see popular products and you can get them first, all of that. So there’s just a lot going on on the customer service sort of membership side. And in the last couple months, they’ve had some interesting announcements about doing live streaming and starting to combine their luxury sort of portal consumer facing, you know, mobile app with content creators, influencers and, you know, enrich the experience. So you’re not just shopping, but you’re, you’re learning and it’s educational and it’s infotainment and all that sort of stuff. So, I mean, you’ve, we’ve really got sort of two different business models. And, um, I guess, you know, that is the question for today. is either of these companies gonna crack the luxury online merge offline question? I mean, is anyone gonna put the business model together and therefore win this space in China, which is half the market? And then I think whoever does that will be very well positioned to replicate it outside of China. So that’s kind of what I’m watching, is these two going head to head. Now there are other players on the field, obviously you have JD and you have Alibaba, the major. e-commerce players, but JD is tied up with Farfetch and that. And then you have the offline players, like department stores, big shopping malls, things like that. You have the brand stores themselves, Gucci, Prada. They all have stores. They’ve been building them in China for a long time. So you’ve got those. You have the outlet chains. I mean, there are other players. trying to put this together, either coming from the offline, the online world, trying to move into the physical world, OMO, or starting at the physical world and trying to move online. Brand stores, things like that. So, I mean, this is where you get to take a stab at it. Do you think either of these companies gonna win? And how would you take apart that question? I mean, who’s gonna figure out OMO luxury? And I would break it down. Well, let me reiterate. I’ve given you a couple concepts here just to sort of repeat. Number one, marketplace platforms. Clearly, Farfetch is a marketplace platform by design. That’s their business model. And then there’s this idea of new retail and online merge offline, OMO. Clearly, CQ is an online retailer that is moving rapidly towards new retail. So we have two different approaches. to this. One’s coming from Marketplace, one is coming from more traditional online retail. Those are kind of the two ideas for today. And then put all this under Learning Goal 26, which is advanced or more complicated new retail. All right, so how would you answer, who would you put your money on? If you were going to bet one of these companies, who would you put your money on? And the way I would take it apart, and these are the questions I would ask you to take a stab at, and I’ve put these in the show notes, is I’d think question What do the consumers really want most? What’s the winning equation? You know, ultimately all business begins and ends with the consumer, the customer. So what is it that the three things they want most and whoever can deliver those will probably do well? Or, because that’d be one question, question number two, what do the large brands want most, especially the famous luxury brands? What is most important to them? Is it tools? Is it communication? Is it tools they can deploy into their stores? Is it better demand forecasting? Is it better tracking fashion and luxury trends around the world? What is it that if you could get them, the best play here might be to just be a service provider for the major luxury brands. That would be, I think about what do they want because they really do carry a lot of weight in this business. And then number three, what do the small brands want? The niches, the boutique brands? You have a handful of the big giants who have traditionally dominated, but you have a thousand small boutiques all over Europe and Japan and increasingly China. Can you provide tools for them? What do they want most? I think you’re probably not going to win by serving all three of those groups equally. I think you’re going to have to sort of focus most of your energy on one of those three groups. It looks to me like Sikku is a lot more focused on consumers. And then… the marketplace model, they’re trying to balance those two through a model. That’s how I take a first pass analysis at this and see if I could get to some strong answers that helped me a little bit. So I think that’s the question for today. So pause the recording. For those of you who are members or not, take a stab at it. Really give it some effort, give it some thought. 10, 15 minutes, if you’re out there walking, you’re at the gym, really take it apart and see if you can get the answers. that if you were to go into your boss or your investor meeting or whatever and say, look, this is what I think really matters in this fuzzy, uncertain playing field. This is what I think matters most. And based on these three factors, which is just first pass thinking, I would put my money on that company. Or I think we should copy that company, or as a brand we should start dealing with that company. Just point your nose in the right direction. Okay, so based on that. What do consumers want most? What do the large brands want most? What do the smaller boutique brands want most? Pause the recording, take a stab. What would you do in this scenario? What do you recommend? And then come back. And welcome back. How did you do? Did you not do it and you just waited for me to start talking again? If you did, press pause right now and really go give it a shot. Okay, I’ve been talking at you for a while and we did kind of a lot of content for today. So I’m just gonna sort of jump to my take. And this is pretty much how we do this course. Like we lay out a case, we allowed some companies, some ideas, I asked you to take a stab at it to try it yourself and then I’ll sort of give you my take discuss it a little bit. I would be thinking of where does the rubber hit the road? And I would be looking at what does OMO look like for luxury for Chinese consumers? I’d really be focusing probably on that consumer piece mostly. They’re the closest to the customers, the key customers, they know what they want. And that, you know, the digital behavior of consumers, particularly in China is changing so quickly. And it’s not just what you’re offering them, whether they like it or not, but based on what you’re doing, are they talking to each other about you as a company? You know, I’d be trying to engage with the digital China network, the CDC and the China Digital Consumer Network. I would be trying to engage with that as much as I could and have a close relationship with that, because I think it’s gonna keep changing in this field. In other fields like beer and stuff, it’s kind of standard and it sort of ambles along. I think… Fashion and luxury is going to keep changing over and over. So I try and stay as close to them as possible. I think OMO luxury is going to be experiential. I think this is one of those spaces where this is experiential retail. It’s not about, hey, it’s a good bag at a good price. It’s how it makes you feel. It’s how do you enjoy learning about it, that you’re watching your live streamer and your favorite KOL talk about this season’s goods coming out of Milan or this season’s. makeup coming out of Japan. It’s all of that experiential aspect. And I think that experiential aspect is totally gonna be OMO. It’s gonna be content creators. It’s gonna be going into the store. It doesn’t, maybe it won’t be a full store. Maybe it’ll just be pop-up booths. Maybe it’ll be new digital tools that we’re deploying in various stores. I mean, I think we’re gonna have a richness of the consumer experience that goes all the way from online to offline. I’d be focused on that, focused on the user experience, and then ultimately if you’re gonna get someone to pay $600, it has a lot to do with authenticity and trust. I think that really does matter. That would be where I’d focused. I’d focused on OMO for luxury, and that would probably get me to be looking at Sikhu much more than the other one. Because I think they really are on the front lines of how behavior and technology are changing with how people engage in luxury. And I think they’re right there on the frontier. And that’s where I would wanna be. That would be sort of my first take. Now, second to that, I think there’s an interesting opportunity to create digital tools and services for small luxury brands and boutiques that levels the playing field for them relative to these big sort of legacy brand icons, Gucci and such. I think that’s a really interesting opportunity. And I think JD plus Farfetch, which are now working together, are very well positioned to start creating a stream of digital tools that you can give. to some random boutique on a side street in Milan that Chinese consumers have discovered and maybe there’s a Chinese influencer who’s there talking about it that could really help that brand take off and do things that traditionally only the powerhouses could have done. I really liked that idea as well. And I think JD and Farfetch, if you look at, JD has so many IT people, so many AI people. that those tools are gonna come from a company like that, probably not from a Sikhu. They’re just outgunned. So I’d be looking at all the ways that a brand, a boutique brand could do storytelling to talk about who they are, live streaming, experiential aspects, creating content, building in tools such that the China network of consumers is talking about you. and getting that to take off. I think that’s very, very interesting. Now there’s one other idea here I did wanna touch on is what I call, before I gave you a concept I called the Smile operational network, I’m sorry, the Smile operational marathon. Which I sort of said, look, if you’re gonna compete day to day in operations, not as a business model, but just day to day operations, which we all have to do. you’re gonna have to focus on one or two operational dimensions. And one of them I mentioned, but I didn’t really talk about very much, was the E, smile, S-M-I-L-E. The E stood for ecosystem shaping and management. The idea that as you engage as a retailer in particular, as a brand, one of the most important operational skills you probably need is how do you engage with your ecosystem? Alibaba, JD, Amazon. WeChat, you know, that’s a very big part of your business. How good are you at dealing with the ecosystem, managing your interactions with it, and also perhaps shaping it if you, if you get enough leverage in the situation. When I look at fashion and luxury, what strikes me as interesting is there might be an ability to shape the ecosystem. Uh, I gave a talk on fashion AI. by JD and what they’re doing. And one of the things they talked about was using AI to continually track social media and other websites around the world to see what people are wearing on streets and what they’re posting and to get sort of a real-time heat map for fashion trends as they emerge city by city by city. And then you can start to do better demand projection and inventory management and product development quickly. against trends as they emerge city by city because you have visibility by that because it turns out computer vision is very good at seeing close. I’m not convinced there’s not an ability to be offensive in that area and to start shaping fashion trends aggressively by spotting what’s taking off on the streets of Hong Kong or on the streets of Tokyo or on the streets of Warsaw because you have visibility into this heat map. and then immediately start rolling out products and pumping it out through digital marketing because you’re good at the network and shaping the fashion trends as a company. I’m not convinced that’s not doable by certain really good companies. So this idea of maybe the operational direction dimension you wanna compete on is the ecosystem management and shaping. And if a company gets some good capabilities in that, it could be pretty impressive. So I think about that as maybe a way to, that something you would deploy as a digital tool to give both big and small brands. I’ve been thinking about that. Last point on this, so that’s where I would fall. I would be sort of 70% OMO for luxury, which means I’d be looking at SIKU. 30%, I’d be looking at developing digital tools for small and niche brands, and that would take me to look at Farfetch and JD. My inclination is this is probably not a platform business model. at the end of the day. I think this is overwhelmingly a new retail story, an OMO retail story, not a platform business model story. I think it’s too unique. I think the characteristics are different and they’re changing and there’s not that many brands at the end of the day. So I would be focused more on OMO new retail. I use those words interchangeably, new retail and OMO. I consider online merge offline anytime you’re integrating physical and intangible. digital assets into one experience, and new retail was just the first iteration of that because retail went first. So you’ll notice I use those interchangeably. But you could have OMO in healthcare, in education, and in other things. Anyways, that’s kind of where I’d fall on that one. And I think that’s enough for today. This has been kind of a lot of content for today. But I’m just having a great time as I, I’m back in Bangkok, I got off the island where I didn’t have a very good microphone, now I’m back in my little setup here. And it’s great. Things are taking off and the world’s starting to open up and I’m starting to plan my trips again. So I’m looking forward to that. So life is pretty good. And I am reaching out to some of the members, subscribers, getting feedback. If you are available to talk about that stuff, I would really appreciate it. It’s very, very helpful to me. And if you’re not, feel free to sign up and join our community. We are starting to build a community of people who aspire to be. think digital gurus. I mean, my goal here is to build a community of people who have spent the time and spent the hours and, you know, sort of participated as they went along and became really experts in all of this stuff. And my little private dream is there will be a group of people out there over time that people start to notice, hey, there’s this population of people who just seem to know this stuff cold. And every time one of these questions come up in a company meeting or whatever. You know, that person, Bob or Susie, they just, they always seem to be able to take this apart. How are they doing that? That’s kind of my goal for this, the subscribers, the members and this sort of community we’re building is to build a population of digital wizards. So we’ll see, but I think we’re off to a strong start. Anyways, that’s it, but I wish everyone well. I hope you’re having a great week and I will talk to you next week.

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