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spk06: Good afternoon. My name is James and I will be your conference operator today. At this time, I'd like to welcome everyone to the Farfetch fourth quarter and full year 2020 results conference call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I'd now like to turn the call over to Alice Ryder, VP of Investor Relations. Ms. Ryder, you may begin your conference.
spk05: Hello, and welcome to Farfetch's fourth quarter and full year 2020 conference call. Joining me today to discuss our results are Jose Neves, our founder, chairman, and chief executive officer, Elliot Jordan, our chief financial officer, and also Stephanie Fair, our chief customer officer. Before we begin, we would like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise them. For a discussion of some of the important risk factors that could cause actual results to differ, please see the risk factors sections of our Form 20-F filed with the SEC on March 11, 2020 and in Exhibit 99.2 to our Form 6-K filed with the SEC on April 27, 2020. In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non-IFRS financial measures to the IFRS financial measures in our earnings press release and the slide presentation, both of which are available on our website at farfetchinvestors.com. And now I'd like to turn the call over to Jose.
spk02: Thank you, Alice, and thank you all for joining us today. 2020 was a year in which Farfetch lived its values and successfully advanced our Chapter 2 initiatives, executing on our mission to enable the luxury industry. And we did so through a tremendous display of our robust capabilities, resilient operations, and utmost perseverance from our more than 5,000 Farfetchers. This was particularly significant during the height of the lockdown, when many boutiques and designers could not operate their physical shops and relied on Farfetch as a significant source of revenue, and also as customer demand exponentially moved online throughout 2020. As we look towards 2021 and beyond, We are laser-focused on extending our position to be an operating system and digital enabler for the entire global luxury industry, both online and offline, a nearly $300 billion opportunity. In doing so, we'll build on our progress in 2020, where our teams executed impeccably to grow full-year Group GMV 49% to over $3 billion, further cementing our position as the largest global online destination for luxury fashion. This is on the back of a strong first quarter, as we ended the year with our first $1 billion GMV quarter, attracting our largest cohort of new customers and achieved a crucial profitability milestone with our first quarter of positive adjusted EBITDA. During the quarter, we also announced a transformational partnership with industry giants Alibaba, Richemont and Artemis to go after our shared vision for luxury new retail. by leveraging Farfetch's platform capabilities in combination with their collective expertise in luxury and retail technology. As we enter 2021, we are more determined than ever to execute on our mission to be the global platform for luxury, connecting creators, curators, and consumers, and we are focusing our strategic roadmap across five major themes of our Chapter 2 strategy. The first three are, one, strengthening our luxury partnerships, two, China, three, the luxury new retail or L&R platform, which I will talk to, and the remaining two are, four, the Farfetch brand, and five, unrivaled global customer experience, which Stephanie will address. Starting with our luxury partnerships. What we are continuing to see is a paradigm shift, with brands' attitudes towards digitization moving from nice to have to being the number one priority. And looking across the landscape, Farfetch is uniquely positioned to be their strategic partner. Not only are we the only global luxury platform offering e-concessions, brands' preferred mode of operating with multi-brand channels, but we are continuing to offer revolutionary innovation by advancing L&R, which is what brands need right now. In fact, our top 10 e-concession brand partners increased their participation on the marketplace as they grilled their stock listings by more than 70% in Q4. And our top 100 brand partners have remained lasting partners with 100% retention over the past three years. Our enterprise clients have also expanded their businesses via our platform. as we powered more than 50% growth on average in 2020 in the brand.com e-commerce channels of our more mature fast-edge platform solutions or FPS clients. Those who have been on FPS for at least one year. Turning to China. Over the next five years, mainland China is expected to become the largest luxury market and represent more than $100 billion of luxury spend. Our localized operations in China position as well to attract valuable Chinese customers by enabling them to shop a global supply of luxury fashion from up to 3,500 of the best brands via our app, website and social commerce channels such as WeChat, in their native language, supporting their preferred payment methods, and for our private clients via a local stylist who is attuned to their local zeitgeist. As a result, we are one of only a few Western e-commerce companies who are succeeding in China. This is evidence by the fact that mainland China is our second largest market for the marketplace and has continued to be a growth driver of our global business, having grown GMV faster than the overall marketplace again in 2020. Additionally, in another demonstration of our technological and operational excellence, we are delighted to have soft launch Farfetch on a dedicated storefront in Tmall's luxury pavilion, our PLP, on the 5th of February, ahead of schedule. Our soft launch significantly expands the selection of luxury products on Tmall. Of the 2,400 plus brands we have already made available, more than 90% did not previously have a presence on this channel. As a result, T-MOS consumers are now able to shop the broader selection of luxury fashion online at a time when they are unable to travel to their favorite luxury shopping destinations, and we believe these shoppers will increasingly repatriate their luxury purchases to domestic channels such as the Farfetch app or TLP. We will continue to add more brands to the storefront up until the official launch on the 1st of March, at which time we will begin deploying significant marketing resources to promote our brand with PMO's 779 million consumers. In 2021, we will lean in and invest behind building our audience in the TLP channel, as well as overall fast-edge brand awareness in China across all channels, including apps where most of our business is conducted, as we believe this is the time to invest in brand awareness in the market widely recognized as the key driver of growth for the luxury industry. onto platform and the luxury new retail vision. ClassH is more than a marketplace. From day one, we set out to be a platform for the luxury industry. And over the past 13 years, we have been expanding our platform capabilities to address the needs of our marketplace and branded sites, as well as those of the broader luxury industry. which we envisioned would become increasingly digitized. Our vision also encompasses offline luxury channels. And since 2016, we have been building out our Star of the Future capabilities, which are now part of the overall FPS product suite. We will leverage these technologies in pursuing our L&R strategy to address the needs of luxury businesses, such as Harrods, our largest enterprise client. This time last year, we launched harrods.com on SPS. Since then, our capabilities have been instrumental in enabling the iconic luxury department store to continue serving its global clientele throughout the pandemic. We have also continued to expand our solution set for our enterprise clients. One new, exciting, and we believe unique capability I would like to highlight is SPS's recent launch of e-concessions as a service. This solution enables department stores and detailers to directly plug into brand stock systems and effectively become data places. Our first implementation is now powering Burberry's e-concession on Harrods.com, and the results over the initial couple of months indicate that the feature is delivering a meaningful lift to Burberry's performance on Harrods.com. Our enterprise-raised operating system proposition powers some of the largest and most prestigious luxury brands. from Chanel to Harrods, and is endorsed by Alibaba, Hichemont, and Artemis to deliver digital innovation for the industry via the luxury new retail vision. This squarely positions Farfetch in the category of digital enablers and reinforces my beliefs that Farfetch is the platform that will enable the entire industry to thrive. a unique vision we have to not only go after the online luxury market, but also to address the digital strategies of our enterprise partners' offline channels and the entire nearly $300 billion global luxury industry. Clearly, we are at the start of this journey, but we are tremendously excited about luxury new retail, its relevance today for luxury, and the spectacular reaction we are getting from the luxury industry to our vision. We will continue, therefore, to invest in our technology and also start investing in our B2B brand and pursue enterprise sales efforts with increased organizational focus. While we remain committed to achieving profitability for the full year of 2021, we have also earmarked a portion of our anticipated profitability to fund these growth initiatives. Before passing to Stephanie, I'd like to update you on the important work we are doing around ESG. Our Positively Fast Hatch initiative integrates a multitude of programs throughout the business to further our vision in a sustainable way. In 2020, a year that highlighted more than ever the importance of using our global platform to be an enabler of positive change across the industry, we made significant progress across each of our five positively far-fetched pillars. Since committing in April 2020, we have been carbon offsetting all deliveries and returns. We also significantly increased our offering of sustainable products, our Conscious Edit, which now represents one in 10 products on the marketplace, and more than 5% of 2020 Group GMV. And importantly, made clear our platform is a platform for everyone, through initiatives such as our Black Designer Edit. which helped drive 66% GMV growth for these brands on the marketplace. These are just a few examples of the positive changes we're driving. I would invite you to visit the ESG tab on our investor relations site at 5HInvestors.com to access an infographic we've published with some key highlights from 2020 and learn more about our longer-term aspirations which we outline in our 2030 goals. I'll now let Stephanie walk you through our two other pillars, brand and unrivaled global customer experience. Stephanie.
spk04: Thank you, José. Hello, everyone. It's great to speak with you all today and give you a whistle-stop overview of our Chapter 2 initiatives as we redouble our efforts to build a truly customer-centric organization. To touch on our brand pillar first, as Jose summarized, we had an incredible 2020. It was a pivotal year for our brand as we introduced our new brand identity and launched a full funnel brand marketing campaign. The campaign was focused on building brand love and an emotional connection to Farfetch by communicating what makes Farfetch unique, who we are, and what we do. It helped drive greater awareness and transformed our brand image with luxury consumers and brands alike. and there's still so much more to do. I could spend hours on everything we have done for the customer in 2020, but as they say, an image says a thousand words. So I'd like to invite you to view a video we've made available on our IR site at farfetchinvestors.com. We have the ambition to be the most loved brand in luxury and the first and last destination customers go to when they want to be inspired or shop for luxury. As such, in 2021, we intend to invest in initiatives to bolster our brand awareness and cement our unique positioning. Some of these initiatives include our second brand campaign going live in April in targeted cities in the US, China, the Middle East, and the UK. Only on Farfetch, our strategy to differentiate our brand by playing to our unique strengths with an ongoing focus on our boutique proposition, on leveraging our NGG acquisition, and delivering exclusive brand partnerships while deploying all our capabilities from our global reach to our innovation features. This follows our successes with brands like Gucci, Burberry, and Marni Homewear in 2020, but also in fine jewelry with Chopin, who made Farfetch their platform of choice to unveil their 2020 holiday collection. And already in 2021, we have executed on the launch of Richemont's new concept with Albert Abbas, AZ Factory, among other partnerships, and hosted the live stream of the men's shows for Dolce & Gabbana and Off-White's new season concept, Imaginary TV. These are examples of partners who, in addition to seeing Farfetch as one of their sales channels, also recognize the targeted luxury audience and marketing capabilities we offer to support their own efforts to grow their brand. We continue to invest in full funnel marketing and driving efficiency in existing channels while adopting new ones such as programmatic TV, Snapchat, and TikTok. By leveraging our unique data capabilities, we aim to create a balance between paid efforts and cost-effective owned channels by thinking in an integrated way between paid search, app downloads, display, affiliates, social, and CRM channels to drive acquisition and retention. And to do this more sustainably and build brand love, we will continue to focus on delivering an unrivaled global customer experience, our fifth strategic pillar. Starting with our private clients, our most valuable and most engaged customer segment, which serves as our proxy for the most demanding customer and who we reference to help us streamline our efforts across the business. Here, we will continue to lean into new ways of shopping enabled by technology and accelerated by COVID, such as live stream events and virtual styling appointments. We will continue to scale our fashion concierge service, which secures any item on demand, whether on Farfetch or not, and provides a fantastic retention tool and unique differentiator in our overall proposition. The team regularly sells items with a value above $100,000 and on occasion much more. You might remember our $1 million sale earlier in 2020. And importantly, we continue to invest in our stylist team, which spans 29 global cities and who build brand love by providing even more personalized service to the customer, wherever they are. In 2020, we acquired almost 2 million new customers at a lower year-on-year cost of acquisition. Our investment in marketing tech over the years and our wide data sets enabled us to invest efficiently and nimbly as search volumes and market demands shifted throughout the year. While we continue to lean into customer acquisition and particularly app downloads, 2021 is a year for retaining these customers through our CRM efforts, increased personalization, and our access loyalty program. This is in the context of our updated survey, where 66% of customers polled state that they will do more or most of their luxury shopping online. So the opportunity is clearly there. In 2020, we brought our consumer tech products even closer to the customer by orienting ourselves towards delivering value along the customer journey and making the Farfetch experience even more inspirational, relevant, and compelling for the customer. And looking to the future with new ways of shopping, In 2021, we will create new opportunities for growth through the expansion of our pre-owned offer and launch pre-order as a way to continue offering newness to our customers and extend the full price selling window for our partners. I am also very excited to announce that we will be laying the foundations for launching the beauty category on the marketplace in 2022. Beauty has been one of the faster growing personal luxury goods categories and represents approximately 25% of the nearly $300 billion luxury industry. We intend to enter beauty in an only on Farfetch way, the framework I mentioned earlier. What this means is showing the customer an immersive crossover between fashion and beauty to appeal to our existing audience of fashion lovers. Secondly, leveraging our innovation capabilities to offer features such as virtual try-on for the makeup category. And finally, from a business model point of view, allowing beauty brands to launch their products on Farfetch via our e-concession model and benefit from the higher margins that entails. And now I'll hand the call over to Elliot to discuss our financial results and outlook.
spk07: Thank you, Stephanie. And hello, everyone. I am pleased to be sharing with you the latest financial results of the Farfetch group. In particular, the important milestone of achieving profitability at the adjusted EBITDA level for the first time in Q4, which was also our first ever $1 billion GMV quarter. We have closed the year in a strong financial position with cash reserves of $1.6 billion. The fourth quarter of 2020 was ahead of the expectations we outlined to you on our last call, with Group GMV growing 43% year-on-year to $1.1 billion, digital platform order contribution margin increasing 310 basis points year-on-year to 35.1%, total G&A and technology expenses, our operating costs, are lower year-on-year as a percentage of adjusted revenue by 540 basis points. We achieved positive adjusted EBITDA of $10 million against negative $18 million one year ago, and we delivered $201 million of positive cash flow from operations across the quarter. This completes a remarkable full-year 2020 performance of group GMV growth of 49%, ahead of our initial 40% to 45% growth expectation. Digital platform GMV growth of 42% and acceleration from 40% growth in 2019. An increase in digital platform order contribution margin by 350 basis points year on year. Expansion of brand platform growth margins by 325 basis points year on year. a reduction in operating costs as a percentage of adjusted revenue by 570 basis points year on year, adjusted EBITDA of minus $47 million versus minus $121 million in 2019, and with $116 million of positive cash flow from operations over the year. looking at Q4 by business segment and starting with the digital platform, which grew GMV by 49% year-on-year to $939 million. Within this, third-party GMV grew 40% year-on-year, led by growth in Farfetch platform solutions and a more than doubling of brand e-concession sales on the marketplace. The third-party take rate was 28.8%, a slight decrease year on year due to the increased mix of FPS and a lower proportion of higher margin immediate solutions revenue. Third party gross margins were 66% versus 68% in the prior year quarter, reflecting the impact of higher fulfillment costs per order on our free shipping and free returns proposition. GMV from our first party business grew 96% year on year and represents a 16% share of GMV, supported by our direct to consumer first party original proposition at 4% of GMV. First party gross margin stepped up from 24% to 36% year on year due to a higher mix of full price sales and growth of our first party original offering. Digital platform order contribution margin expanded 310 basis points year-on-year to 35%, driven by efficiencies in demand generation spend, which reduced from 23% of digital platform services revenue in Q4 2019 to 19% in Q4 2020. These efficiencies were achieved while we also acquired over 500,000 new customers in the quarter, our highest ever, and maintained strong customer retention by efficiently growing non-paid channels and leveraging data to lower spend per visit on paid channels. The work is paying off with lower customer acquisition costs year on year. despite increasing costs for paid media across the luxury fashion space. Higher adoption of the Farfetch app at now 55% of marketplace GMB. Payback on the Q2 2020 cohort within six months and the Q3 2020 cohort with higher three-month lifetime value than the previous 10 quarters. We continue to focus on full price sales across the marketplace with fewer promo days in Q4 2020 as compared to 2019. This helped drive better economics for sellers on the platform. As a result, we drove higher average selling prices, but fewer items per basket, which has resulted in a slightly lower marketplace average order value year on year at $626. The brand platform outperformed expectations with GMV in revenue of $104 million and gross profit of $52 million at a 50% gross margin. This was due to relatively strong wholesale demand for spring-summer 21 options, particularly within the Palm Angels collection. In-store revenue grew 40% year-on-year due to the opening of direct-to-consumer off-white stores in key locations. However, as expected, light-for-light sales were down approximately 20% year-on-year due to pandemic-related store closures. Turning now to our operating costs, which were stable quarter-on-quarter at $172 million. This demonstrates the leverage we are able to achieve from our platform infrastructure, which has supported a 32% increase in GMV between Q3 and Q4. As a result, we delivered a 540 basis point reduction year-on-year in spend as a percentage of adjusted revenue from 42% in Q4 2019 to 37% in Q4 2020. This culminated in our first ever profitable quarter with Q4 adjusted EBITDA of $10 million, representing a 2.2% adjusted EBITDA margin. Operating loss was $223 million, primarily due to share-based payments of $119 million and depreciation and amortization of $60 million. One final point to note regarding Q4 is that we have seen a $38.65 appreciation of the Farfetch share price during the quarter. It's important to note this increase in Farfetch's valuation as it translates to a non-cash $2.1 billion revaluation on items held at fair value. This additional $5.88 loss per share is the result of revaluing the liability in place over our convertible notes and joint venture in the Middle East, which can be settled in far-fetched shares. Before we outline guidance for the next 12 months, I wanted to remind everyone about our previously stated financial goals for the business. including delivering a 30% adjusted EBITDA margin over the longer term. We expect to achieve this by capturing significant market share, delivering further expansion to our unit economics, and continuing to leverage the platform infrastructure. Our 2020 results demonstrate execution in line with these goals, As a result, since our IPO year of 2018, GMV has grown from $1.4 billion to $3.2 billion, primarily due to a doubling in GMV on the digital platform. Adjusted revenue is 2.9 times higher, and adjusted EBITDA margin has improved from minus 19% to minus 3%. And we expect to deliver positive adjusted EBITDA for the full year of 2021. In 2021, gaining market share remains our priority, as does investing into the platform to capture our longer-term opportunities. As such, China will be a key focus for demand generation and brand investment as we look to increase brand awareness, build a large TLP audience, and ensure Farfetch is the destination for luxury fashion in this market. Globally, we will also invest in building our brand and continue to invest in our platform technology to deliver functionality to offer new categories such as beauty and additional enterprise-level platform functionality, particularly supporting the luxury new retail vision. We are also anticipating higher unit shipping costs and some additional expense for European digital services taxes as well as some short-term impact to first-party gross margins as a direct result of the UK's withdrawal from the European Union, all of which will put pressure on our order contribution margin. We actually see an opportunity to leverage our planned fulfilment by Farfetch infrastructure in Europe to support UK-based department stores, boutiques and brands, including Browns, over the longer term. More on this in the coming quarters as we expand our European warehouse capacity and begin diverting our own first-party inventory to continental Europe. Taking all of this into consideration for the full year of 2021, we are targeting digital platform GMV growth of 30% to 35%, which equates to two-year growth of 85% to 90%. We expect this growth to be front end weighted. Adjusted revenue is expected to grow a little faster than digital platform GMV as we anticipate faster growth of our first party original sales. We expect digital platform order contribution margin of 35% to 37%. Our operating costs are expected to leverage further to be between 38% to 40% of adjusted revenue which will result in an expected adjusted EBITDA margin of 1% to 2%. Looking at Q1 2021, we expect digital platform GMV growth of 50% to 55%, a slight year-on-year step-up in digital platform order contribution margin to be between 32% to 34%, Brand platform revenue to be between $95 to $105 million at circa 48% gross margin and adjusted EBITDA to be marginally ahead of Q1 2020 at minus 19 to minus $21 million. Turning back over to you now, Jose.
spk02: Thank you, Elliot. In summary, 2020 was a landmark year. where, despite the unimaginable challenges encountered, we exceeded our own initial expectations in terms of driving growth and scaling the business, and meaningfully accelerated our strategic positioning as the principal platform for the luxury fashion industry. None of this would have been achieved without the dedicated efforts of all our far-fetchers, And I want to thank them for leaving our values day in and day out, being brilliant, revolutionary and human, thinking globally, amazing customers and working todos juntos for the sake of the creators, curators and consumers of this industry we love to serve. Looking forward, 2021 will be a year of leveraging the incredible achievements of Chapter 1 and the early years of Chapter 2 to enter a new phase of growth for Farfetch, which will drive significant opportunities in many years to come. We are laser-focused on being the platform for this global industry, helping brands and retailers in a spirit of win-win partnership to fully digitize their businesses online and offline. Whilst we remain focused on profitability for full year 2021, we will redeploy some of the gains from our continued growth behind these five main pillars. Luxury partnerships, China, luxury new retail platform, brand, and customer experience as we continue to go after our Chapter 2 vision and the long-term opportunities ahead to be the platform enabling this nearly $300 billion global luxury industry. Thank you. And we will now open the call for your questions.
spk06: And we will now take questions. If you'd like to ask a question, please press star then one on your telephone keypad. Our first question comes from the line of Oliver Chen with Cohen. Go ahead, please. Your line is open.
spk08: Hi, thank you. Regarding the environment that you're seeing now, what are you seeing with the promotional environment? And what do you think may happen as stores reopen and the vaccination pathway takes hold globally? Elliot would also just love your take on your guidance for the contribution margin for Q1. What's underlying that in terms of what you're expecting in the marketplace? Thank you.
spk02: Hi, Oliver. I'll take the first part of your question. You know, what we're seeing in terms of promotions is Actually quite encouraging. We think the market last year became more disciplined. Brands are increasing their moves towards e-concessions. You've seen Caring publicly and Moncler and other brands clearly saying that the e-concession model, which is a model that we pioneered in this industry, is the model to go. Obviously, e-concession sales, where brands control pricing and promotions, they tend to be less promotional. In our case, the strategy is clear and independently of what's going on in the market, We said one year and a half ago that we would focus on a full-price strategy, and we've had drastically less promotions and much less promotional days in 2020 than what we had in 2019. That is working really well. As you could see, growth is in fact accelerating now in Q1 even, and the e-concession business, for example, is growing at close to triple digits, and we continue to see a much bigger full price mix coming through, which is fantastic news, and it's a valuable execution of our strategy. you asked about uh you know stars reopening obviously we all hope that happens as soon as possible um i think you know what we're witnessing is a paradigm shift in this industry um it's an industry that remains still today very under penetrated and it was uh online sales were 12 percent of luxury sales in 2019 that jumped to 23 percent in 2020, but it's still a low number and McKinsey, Bain and other analysts predict this to continue to grow very fast up to 35% in a few years time. So we will continue to see this secular trend of consumers discovering the benefits of online shopping and therefore we're very confident that that is a sustained growth and a paradigm shift for consumers and also for brands who have seen the need to elevate digital strategies to their number one priority. And here we're incredibly positioned as the only platform specializing in this factor and offering a suite of capabilities both on multi-brands Monobrand, which is their own brand, .com, also online and offline solutions with Start of the Future. So that vision, luxury new retail, is really what the industry needs. And the reception has been spectacular to all these products that we bring into market, including the e-concession as a service that we launched with Harrods and Burberry. I think that can be revolutionary. for the industry that can really accelerate brands moving very quickly to e-concessions with e-tailers and department stores alike to the benefit of all parties involved.
spk07: Oliver, hi. Great speaking to you. Just following up on the second part. So on the Q1 outlook, I mean, we've bounced out of Q4 in a really strong position, particularly on the GMV side of things. So, you know, we're expecting to actually step up order growth year on year to achieve an acceleration between Q4 to Q1, 50% to 55% GMV growth. Particularly strong on spring-summer 21. The options that we're getting through from all marketplace participants is... It's really seen good, strong growth. And so on the order contribution, there's underlying savings that are coming through. As always, we're getting a better full price mix on product, which will help drive the gross margins on the first-party business in particular, obviously the first-party original product. Palm Angels in particular is very strong, helping drive the direct-to-consumer gross margins. The SPS side of our direct-to-consumer offering is now actually as big as sales on the marketplace. So we're really managing to attract customers across a number of different channels there. We're also seeing savings coming through from our use of data within marketing to drive down the cost of acquisition and use more low-cost channels, the apps, driving fantastic levels of engagement to keep costs down as well. So sort of underlying, things are in the right direction. We do have to manage, though, some short-term pressure. We are seeing shipping costs go up. Obviously, the growth of e-commerce recently is putting a lot of pressure on supply and demand for global shipping, and that is flowing into higher charges for us. The team's doing an amazing job to mitigate as much of that as we possibly can, working with our carriers. working with some innovative solutions around shipping routes and packaging and those sorts of things. But I do think there will be some pressure on the order contribution margin there. We're also seeing pressure because of this digital services tax that's been introduced across European countries. We're sharing the cost of that. with marketplace participants taking on a fair amount ourselves. So that will put pressure on auto contribution margin. And then lastly, as I said earlier on, the UK's exit from the European Union has caused some operational challenges near term, but also some additional cost challenges as goods move between the UK and Europe. We've got a lot of products for Browns here in the UK, so that has to be sold out. I think there'll be a little bit of impact on gross margin, but That will be short lived. As we move into Q2 and beyond, we're going to move product not destined for our UK stores and not destined for UK online consumers. We're going to move that to continental Europe and to our far-fetched solutions. That means less cross-border to and from the UK. And we're actually looking to roll that out to as many UK department stores, boutiques or other brands that are also seeing the same challenges. So we're actually turning the changes there in terms of regulation into a bit of an opportunity for us as we move forward.
spk06: Our next question comes from the line of Eric Sheridan with UBS. Go ahead, please. Your line is open.
spk10: Thank you so much for taking the questions. Maybe just two-parter on the soft launch of the storefront on Tmall. I know it's early days, but any learnings or things you're seeing in the market as you do that soft launch I think would be of interest to investors. That's number one. And number two, you know, as we look out over 21, I think that soft launch is maybe earlier than we thought. So in terms of the going forward quarters, any sense of what investments you still see as critical towards your success in that initiative in China, and what sort of elements of contribution are baked into the four-year guidance from that initiative? Thanks.
spk02: Hi, Eric. Great question, thank you. It's, I think, an incredible milestone, not just for Farfetch, but I think for the entire industry. Early next week, we are going to move from soft launch to official launch. That means that the vast majority, practically all the 3,500 brands, on the Farfetch platform are going to be available to Tmall's 779 million customers. 95% of these brands did not have a presence on Tmall. That includes NGG, for example. And this is very, very exciting. I've received messages from CEOs, right, left, and center, very excited with What is an incredible achievement with one single integration with Farfetch, these brands are able to address the Chinese customer. They were already on our Farfetch marketplace in China through our apps and WeChat mini programs. But now they open without any work from their side and without any investment, they open to the Tmall channel with almost 600 million customers. very very exciting it's a channel where as in any other channel we have to learn we have to learn how to utilize the platform and do the main generation these platforms are extremely sophisticated as you would imagine so we have to apply our data capabilities our max impact capabilities to these platforms the same way we apply them on Google or Instagram or any other, or WeChat. That will take some time to fine-tune, but we're very confident that over the longer term, this will be a very, very meaningful opportunity. And meanwhile, the FastEdge app, which is the vast majority of our sales in China, continues to go from strength to strength. So really fast growth on what is our main channel there. In terms of investment, that, as Elliot said, is going to be allocated to that channel, both in terms of brand awareness, upper funnel, and also performance marketing within the the alibaba platforms and even external platforms uh to that channel we want to do a push also for the awareness of firefetch in china overall because i think this is a year where uh the chinese luxury customer is not yet traveling and is really uh flocking to the to the online luxury um channel so to say um and so we think this is an unmissable opportunity to capture um brand awareness in that market. I think it's early days in terms of baking those elements into guidance. And therefore, we are going to continue to learn with that channel and update you as we go along.
spk06: Our next question comes from the line of Douglas Anmuth with JP Morgan. Go ahead, please. Your line is open.
spk03: Hey, thanks for the question. It's Corey on for Doug. Two from us. First, just curious, what you're seeing in markets that have started to reopen and maybe how that's shaping your thinking for growth in 2021. And then you mentioned earlier on the call the beauty category launch. So just hoping to circle back to that a bit. Maybe if you could talk a bit about the opportunity that you see in the beauty category longer term and then any specifics around launch timing or brand partners that you may have lined up. Thank you.
spk02: Hi, Doug. I'll take the first part of the question, and then Stephanie will talk about beauty. Very, very exciting new catchway that we're going to launch in a big way in 2022. Look, I think this new paradigm shift that we've seen with consumers is really here to stay. This is not just a belief, right? We can go through the data points, both macro and micro. So on the data points we have at FastEdge, you know, I think the strongest data points are the cohort data. So we added, as you know, 500,000 customers in Q2, 400,000 in Q3, over 500,000 new customers in Q4, which was the record. We now have cohort data from Q2, and it's incredible that data. So the retention is very strong. We have lifetime values for those customers which are higher than the previous 10 quarters. Those customers, the cost of acquisition of those Q2 customers has been paid back in less than six months, therefore. And the Q3 cohort of customers is, as I said, showing very strong repeat purchase behavior, spent per customer behavior. We also conduct surveys. We conducted another one just recently to these new cohorts of customers. 66% of customers have confirmed they are going to shop more online, or actually do most of their shopping online, either more or most, from now on, independently of stores, closings, openings, etc. And then you look at the macro picture, right? So this is a category that is still very under-penetrated. You know, it's 23%, which is a 2020 number, There's plenty of room for growth. We ended here with 3 billion in GMV, in what is a 300 billion, give or take, probably smaller due to COVID, but let's say $300 billion steady state. So that's 1%, right? So this is huge, huge. We're only scratching the surface here. We have access to markets such as China, where online penetration is even lower. So, you know, we're not concerned at all with the reopening of the stores. In fact, we think it's a great opportunity. It's a great opportunity to help primarily the smaller boutiques and smaller brands to drive customers back to their shops. We're working on that. And how can we support the community to get back in their feet? Because I think in the end, everyone benefits from a healthy sector and the healthy industry.
spk04: And I'll take the question on beauty. Hi, Corey. Hi, Doug. Thanks for your question. We've always said that as a business, we want to tackle the entire $300 billion personal luxury goods category, and that includes beauty, which is about 25%, but it's also one of the faster growing categories. And especially we've seen during this last year, that beauty has performed particularly well as people are more comfortable buying online. So we've been thinking about this for a while and we really want to launch a full proposition end-to-end and really think about it in a unique way. This is not about just launching an adjacent category. And we believe that we can truly lead in this space. So the approach we've taken around beauty is around that framework I mentioned earlier, which is an only on Farfetch way, which is, in other words, what are the unique selling points about Farfetch? What is our unique proposition that means that customers will come to us as a destination? And we've done extensive research around on this user research. And one of the things was an immersive crossover between fashion and beauty. Our customers and Gen Z tell us that they want to shop full looks. So there's investment in content and in our customer journey and proposition around how we want to present beauty. The second one clearly is playing on our USP around innovation, and there's a lot happening in the beauty space around innovation, particularly if you think about the merging of the physical and digital experiences and how do you bring the experience of a physical beauty store online. And there's so much that can be done with augmented reality. So that's something that Farfetch can really play into, not just through our own technology innovations, but because we're a platform, we're also able to plug in incredible innovations from startup partners, which really keeps us up to speed with the latest technology out there. And then third and very importantly, I think from a partner standpoint, we've had huge enthusiasm from all of the partners we currently work with, and many of them have their fashion business and have a beauty proposition as well. But also beauty brands have been following what we've been able to do for the fashion industry and how we've been an enabler to the fashion industry. And so they're seeing this opportunity. around partnering with Farfetch. And in particular, if you think about our unique business model, it's e-concessions, which I believe is unique. Beauty brands are very used to concessions in department stores, but it's not really available online. And that gives them um better margins and really control of their products so we've had a lot of enthusiasm from established beauty brands but also a lot of conversations with indie beauty brands which as everyone knows is incredibly important for the young customer so um it's a multi-year roadmap beauty is incredibly specific it requires investment into our architecture our platform developing features and specific content but we're excited about this and we will keep you posted
spk06: Our next question comes from the line of Louise Singlehurst with Goldman Facts. Go ahead, please. Your line is open.
spk01: Hi, good evening, everyone. Three questions for me, if I may. Thank you very much. Firstly, just on e-concessions, it definitely seems to be the increasingly preferred dialogue for brands and online. There's also been some chatter in the industry about e-tailers considering type of model as well. I suppose the question really is for Jose on thoughts around you know, Farfetch clearly the leader, but is there a view that, you know, the competitive landscape might change a little bit, Farfetch being the global player with dots of local, smaller players across regions? And also following on from that, do you think that there's still quite a big change to happen in the traditional kind of wholesale model? And then a quick follow-up for Stephanie, if I may, on beauty, just also on the topic of reconcessions. just to clear at this point on the beauty strategy is that purely for the e-concession direct with the brands or would that also be a multi-brand boutique type arrangement that sounds super exciting and then my second question if I may just if you can tell us anything about what you saw in the surprises maybe in terms of like the cohort in 2020 any changes in terms of average age, demographic, regional changes that may have been a surprise to you. And then my last question, Elliot, if I may, just in terms of the guidance. Obviously, there is a lot of uncertainty and lack of visibility, everybody. But given, I wonder if you can just help us understand the breakdown of some of the pieces. You've talked a lot about the contribution margin, but I wonder if there's anything you can help us understand about customer stickiness that you're seeing across the cohort. expectations around returns, levels and the take rate. Thank you very much.
spk02: Hi Louise, I'll take the first question and then Stephanie can take the other two. So I think it's really important to clarify how hourly concessions work and how Some of the other deals that you've seen in the market in very early days work, because that's a fundamental difference there. So when a brand, so for example, when Harrods, let's use Harrods and Burberry, because I can talk to the e-concessions as a service. When we connected the Burberry e-concession on Harrods, That gave Harrods access to thousands and thousands of Burberry products, dropped shipped directly from numerous Burberry integrations. So we have many, I don't know exactly, probably 20 or more Burberry flagship stores, Burberry distribution centers in Europe, in the US, in Japan, et cetera, Burberry e-commerce fulfillment centers, This is something that took us six years to build, right? So we have 550 e-confessions. It's now over half of the supply available on Farfetch. It's coming directly from multiple integrations, dozens sometimes of integrations with every single brand. And what happens is that you switch this on and suddenly you see a meaningful uplift because the range is expanded, right? Now, this is what I call a true e-concession. Then, I don't know what to call the others. Maybe let's call them, I don't know, pseudo-e-concessions. You're better than me at picking the names, which are simply a financial arrangement where the brand says, I will ship to you the 300 SKUs that you're getting every season. I want the full margin. You ship me back what you don't sell. So it's a sell or return deal. This doesn't change the game at all for the consumer. So the consumer still sees the same 300 SKUs, nothing changes. The retailer has a lower margin. The brand benefits by having a higher margin and control over pricing and merchandising. So it's a deal that, whilst it is good for the brand, It's not advantageous necessarily for the retailer. It could be in terms of stock risk, et cetera. But to the consumer, it doesn't change absolutely anything. And I think this is where we come in with a fundamentally different proposition to brands. So brands like Burberry today, for example, can go to all their department stores, all their retailers, and say, use this integration, because this integration gives you access to 7,000 SKUs with one single integration. And I think this is very exciting. This can be revolutionary and accelerate the brand's move to e-concessions and be a win-win proposition for the retailer who expands the range for the consumer who sees an expanded range and many unique products not previously available, and for the brand that doesn't need to take risks and allocate parts of stock across dozens of retailers and department stores. So we're very, very excited. We think we have a unique model because six years and hundreds of millions of dollars of technology investment that we do every year, as you know, We now have 550 e-concessions ready to go, including all the top, I think, 90-something percent of the top 30, 40 brands on our platform are on e-concessions with us. So we see this as very exciting developments, including in-duty, but I'll pass the baton to Stephanie on that one.
spk04: yes hi louise nice to speak again so on your question about beauty uh yes the idea is to operate um as mainly as a 3p e-concession business as we have done with fashion on the marketplace and those are the main conversations we're having uh with the brands the large ones and the and the indie brands but the idea is similar again to how we've done it with fashion complement that with uh 1p to really offer unique products and really be able to be nimble and react to customer demands and we're planning to do that through rounds and also think about some of the 1p original opportunities we might have around beauty so We're really thinking about it in a similar way in that respect. But the way we think about it is that really we can enable an industry. So we can enable brands, multi-label, and we've really had a good response from the industry. On your second question about customers, 2020 has been really interesting and an incredible year in terms of new customer acquisition. We've acquired nearly two million new customers. Quarter 4 was 500,000 new customers. So you can imagine that we've been monitoring these customer cohorts very closely to try and understand where they're coming from. And importantly, how can we keep them and retain them through our platform? So we've done pre-brand campaign surveys, post-brand campaign surveys. And we're finding a few interesting data points for you. We're finding that quite a few of them are new to online. And they're coming, for example, from department stores. And this, I think, speaks to the structural change that we're seeing in the industry where people are moving from offline to online. So what we found supports that. We're also finding that we're acquiring a higher proportion of these new customers to our full-price business. And this is in line with our strategy, which Elliot and Jose talked earlier about, focusing on full price. But what this means is that this is a higher quality customer and we've seen increased repurchase rates. And in the same vein, we're seeing more customers acquired through super brands. So what we mean is the absolute top tier of brands. And again, those customers are higher quality customers and have better repurchase rates. So we've seen our one month, three months and six months repurchase rates are higher from 2019 to 2020. And then in terms of deals, we've seen, as you might expect, huge success in China with the repatriation of spend. But we've also seen success in emerging markets. where customers have discovered us. And so markets such as Mexico, for example, where we've acquired lots of new customers. So we really have a lot of pockets of opportunity for 2021, not only to continue doing what we're doing and acquire new customers, because COVID was only an accelerant, but everything we were doing has contributed to that, but also retaining this huge base of customers.
spk07: And then, Louise, on guidance, Elliot here again, you know, obviously we think 2021 is a super exciting year for Farfetch. As you point out, there is a lot of moving parts. And what we've done in setting the guidance is really focus our goals on two things. The first is delivering sustainable levels of GMV growth. And the second is ensuring we grow ahead of the market and capture market share. And we believe the 30% to 35% year-on-year growth ticks both of those boxes. We obviously are good at seizing opportunities. You saw last year, we set out initially to deliver $2.5 billion, and yet we stepped up our growth to deliver $2.75 billion on the marketplace, the overall digital platform, and growing customers at the same time. So if we see opportunities, we'll obviously chase those opportunities down. But I think it's worth pointing out, as we head into Q2 especially, we'll be annualising the launch of Harrods. So FPS becomes more light for light from Q2 onwards as opposed to incremental growth over the last nine months so far. We also have on the marketplace an annualisation of the very high numbers of new customers that we saw from Q2 onwards. So we're expecting the growth will be front-end weighted. As we just said earlier on, it's 50% to 55% GMV growth for the first quarter. And then as we start to annualise those impacts from last year, what I think you'll see is we're going to skew growth back towards more retained customers, including those customers we acquired in the last 12 months. Obviously last year we were skewing growth towards those new customers. This year we're going to see growth skew back towards customer retention from our customer base previous to 2020 and those acquired in the last year. On returns, I'm not seeing any significant movement either way, to be totally honest with you. I think that's fairly neutral for the year ahead. So it's all about order growth on the marketplace to drive what we're seeing in terms of the GMV year on year. In terms of take rate, a couple of things to point out here. First of all, the take rate includes all revenue across the digital platform from all third parties. On the marketplace, we're actually seeing commissions go up year on year. So despite the sort of increasing brand e-concession mix, underlying commissions are actually going up. We're seeing 100% retention of the top 100 marketplace participants at the same time. So they're clearly seeing value that's being created. But as FPS has grown over the last 12 months, we've seen a lower take rate start to flow through. But actually, at the end of the day, it's order contribution that matters because FPS drives higher order contribution. And you have seen that increase over the last year, up 310 basis points in the last quarter. And ultimately, that's what we're focusing on. So guidance for this year is good, sustainable growth, market share gains, improving order contribution, driving further leverage of the fixed cost base. allowing us to invest in the brand, into China, into the platform, and then deliver 1% to 2% EBITDA margins, which will be a fantastic result first year of profitability.
spk06: And we have time for one last question. Our final question comes from the line of Ed Yoruma from KeyBank Capital Markets. Go ahead, please. Your line is open. Thank you.
spk09: Hey, good evening, guys. Just two quick ones for me. I guess first on China, how will it be reported on the P&L going forward? Will you segregate what the JV is doing versus Farfetch individually? And then just as a broader question, you know, I know it's been a strategy over the past year plus to really reduce demand generation expense. You guys have done a great job with that. Are these kind of levels sustainable longer term? Thank you.
spk07: Ed, I didn't quite catch your second question, actually, so maybe we can come back to what that was. On the first question, quite a short answer. No, we won't be breaking out China between the app or Farfetch or the new JV. It will be all reported as our digital platform, GMB, as all other JVs that we have and channels. I missed your second question, actually, if you're still there to repeat.
spk09: Yeah, the bigger picture question, you guys have done a great job at reducing demand generation expense. I know you kind of shifted a little bit into free shipping. I guess kind of looking back on 21 levels, are these sustainable levels going forward, or do you think you'll need to reinvest in that line? Thank you.
spk07: There's two things happening here that are really driving underlying reductions in demand generation. The first is our use of data. We've got more data in terms of luxury participants now than anybody else. and the marketing team has built a fantastic engine to be able to use that data to really target customers and shift them away from high-cost channels towards low-cost channels and retain via the app or through organic or direct traffic. And also allow us to moderate our spend on search engine marketing so that we can reduce wastage in that space and really sort of focus on auctions where we know we're going to get more conversion because the data is telling us we've got customers here that look like customers that will shop with us. So that's an inherent saving that we believe will carry on moving forward. And then the second is everything that Stephanie's been talking about in regards to the investment around the brand. and our engagement with customers in an only on far-fetched way, whereby we have so many unique opportunities to speak to customers from our boutiques, our brands, the curation that we have, our editorial and content, that will allow us to be able to continue to engage with customers, particularly on the app again, which was 55% of our GMB in the last quarter, and that will allow us to continue to lower that demand generation spend. You saw a significant reduction year on year in Q4. Now, I think as we touched on around China, we do want to leverage the asset and we do want to lean into the new opportunity. So we will redeploy some of that short term back into China. But over the longer term, as we push order contributions up, we will see demand generation expense come down.
spk05: Terrific. Well, I think that brings us to the end of the call. Thank you all for joining us. We look forward to updating you on our next quarterly earnings call in the coming months. Have a good night.
spk06: This does conclude today's conference call. You may now disconnect.
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