Breaking Down Farfetch’s Big Beauty Play

Opens in new window

Beauty industry chatter escalated in recent weeks after a WWD report speculated that online luxury giant Farfetch was in talks to purchase Violet Grey, the Los Angeles-based luxury beauty retailer known for its glossy, insider-y edge.

Since its launch in 2014, Violet Grey founder Cassandra Grey, the wife of late-entertainment industry executive Brad Grey, has used her Hollywood connections and access to upper-echelon beauty experts to win consumer trust. For Farfetch, buying Violet Grey could be a lot like its 2015 purchase of Browns, the London-based fashion boutique founded by influential buyer Joan Burstein. In Violet Grey, Farfetch would earn instant beauty industry credibility and a brick-and-mortar presence in the sector, as well as access to the kind of brands that are too prestigious to sell at Sephora but would benefit from broader distribution. (Violet Grey sells independent brands such as Augustinus Bader, Vintner’s Daughter and Westman Atelier, alongside megabrands Chanel and Giorgio Armani, as well as Estée Lauder-backed La Mer and Tom Ford.)

However, Violet Grey — which has raised more than $30 million from a variety of investors, including Japanese conglomerate Shiseido — has a high valuation relative to the volume of sales it generates, estimated to be about $20 million in 2020, according to sources. While the two companies have engaged in discussions over the years, and continue to do so, they have yet to strike a deal.

What’s more, regardless of what happens with Violet Grey, the foundation of Farfetch’s beauty channel — set to go live in 2022 —will be in the relationships it forms directly with brands via its e-concession model, whereby brands have a presence on the site in return for a commission on sales (typically between 20 and 30 percent) but manage their own inventory and logistics.

“The biggest problem the luxury beauty brands have is that they really don’t have an e-concession channel,” Farfetch chief executive José Neves told BoF in February after the company announced its intentions to enter the category. Like fashion labels, beauty brands increasingly want to build direct relationships with customers instead of relying on third-party distributors, including LVMH-owned Sephora, to which they give up both data and profit margins. But unlike in fashion, few beauty brands have scaled up their direct channels enough to abandon wholesale. Other than Amazon, where beauty brands must reckon with the grey market and dupes, “there are very few alternatives,” noted Neves.

In some ways, Farfetch’s approach will harken back to how beauty and fashion brands were traditionally sold together at department stores. The rise of multi-brand beauty retailers over the past 20 years, most notably Sephora, disrupted that consumption pattern, as shoppers increasingly preferred to discover and try-on beauty brands without the help of a pushy salesperson doling out samples — and opinions.

Today, many of the beauty market’s most popular outlets, from Ulta to Credo, are singular beauty-focused destinations. This bifurcation is reflected online, where beauty plays second fiddle to fashion on major luxury e-commerce sites. At Net-a-Porter, which launched the category in 2013, beauty made up only 4 percent of its sales last year, according to data from Rakuten Intelligence.

“The fact that you can be on Farfetch, discovering fashion trends and then having beautiful content that is woven between that journey that allows you to discover beauty as you are discovering fashion or vice versa, that’s what [customers and brands are both] excited about,” Neves said. “I don’t think anyone has fulfilled that vision. I don’t think that’s easy, but that is definitely our goal.”

The platform first experimented with beauty in 2016 via a partnership with UK-based Space NK, a retailer with a well-respected product lineup but limited reach. The venture fizzled out.

“This time is different, this time is a meaningful launch,” Neves said. “We want to have a leading position in the beauty space in due course, so we are going for the number one position in the space.”

To build direct relationships with the biggest beauty brands, Farfetch recruited Sephora executive Sophie Wayman, a merchant who played a role in developing Net-a-Porter’s beauty business. The team will need to convince beauty players that Farfetch is worth giving up a percentage of sales for — and also worth developing an entirely new distribution channel — just as direct-to-consumer retail ramps up.

Many top brands also have exclusive distribution deals with Sephora that could prevent them from partnering with Farfetch.

If push comes to shove, will they choose Farfetch over Sephora? The key benefit of working with Sephora is its massive network of physical stores. The key drawback is the margin brands must give up to be sold in those stores, as well as the control they cede over the way in which their products are marketed and merchandised.

Even if it were to acquire Violet Grey, which currently operates a single store in Los Angeles, Farfetch is not going to come anywhere close to matching Sephora’s offline reach. What it can offer is its grip on the digital luxury consumer, including in markets where Sephora doesn’t have a presence, like the UK. Farfetch’s reach in China, through its deal with Alibaba, may also be attractive to beauty brands.

Like other digital players, Farfetch faces specific challenges in selling beauty in a market where “try before you buy” remains an important component of the experience, especially in the colour-makeup category.

The company is investing in new technology to help overcome this hurdle. Neves has cited augmented reality and virtual try-ons as key elements of the beauty experience Farfetch is building for digital customers, but simpler functionality may prove equally important. Early in its beauty push, Net-a-Porter benefited from making beauty products easy to add on to larger orders through recommendation tools, increasing average order value rather than diminishing it.

“From Farfetch’s perspective, the move [into beauty] is a logical way of boosting sales and developing another revenue stream,” said Neil Saunders, an analyst at GlobalData Retail. “They have an active and engaged audience shopping for fashion who currently buy beauty products but spend their money elsewhere. There is a fairly natural adjacency between fashion and beauty, so the introduction of beauty should stimulate some cross-category shopping and won’t jar with the existing offer.”

And yet, developing a beauty business as strong as its fashion business won’t be easy for Farfetch. Along with training brands to operate in a new way, it also has an increasing number of competitors with which to contend. (MatchesFashion, for instance, has experimented in the space, although a full-fledged category launch has not yet been planned.)

“From the consumer perspective, I don’t think there is a burning need for another beauty destination,” Saunders said. “If it wants to become a beauty destination in its own right, then it needs to differentiate.”

Additional reporting by Chantal Fernandez.

Opens in new window