The grey market for luxury watches is fed by an imbalance in supply and demand in different regions of the world. Oversupply in one area pours into countries with pent up demand, often at destructively discounted prices.
Farfetch thinks it can solve that problem for watches in the same way that it is managing for fine fashion, but is facing significant structural challenges, as Rob Corder discovered in conversation with the ecommerce giant’s vice-president commercial and watch supremo Stephen Eggleston.
WatchPro: Take me back to the beginning of Farfetch so that we can put the company today into some sort of context.
Stephen Eggleston: Farfetch was founded in 2008 by José Neves and current chief technology officer Cipriano Sousa, who had the idea of creating a platform for the global luxury industry. They saw a massive opportunity to connect disparate stock sitting all around the world with a global luxury audience. They wanted to break down some of the supply and demand barriers that had existed in the luxury space for an awfully long time.
José felt the way to do this was to develop a marketplace platform. His aim was to help customers by curating the experience and taking control of every element of the customer and the seller experience. He saw three things in the luxury fashion industry at the time that pointed to imminent change. First, he thought that the internet was going to disrupt the luxury fashion industry in fundamental ways over time. The fashion industry then was like the watch industry today, which has barely started on the same journey. Secondly, he thought the luxury sector would need a platform that aggregated stock and would provide a breadth of product selections that could not be found anywhere else and could be presented in a beautiful and intelligent way that would inspire people to buy. Thirdly, he thought that traditional marketplaces, which had been around for quite a long time by 2007, were not suited to serving the luxury end of the industry where we are competing on more than just price. There is emotion, history, craftsmanship, stories to tell. You have to get these things right if you are going to persuade somebody to part with thousands of pounds for a dress or watch.
He turned these thoughts into a business that started in 2008 and has been growing rapidly for the past 10 years. Today Farfetch.com sells products from about 50 countries to customers in around 190 countries. We have over 1000 suppliers ranging from multibrand independent boutiques to luxury brands that supply us directly including the likes of Gucci, Prada and Burberry. Most recently we have started working with large department stores as well, such as Harvey Nichols and more recently Harrods.
WatchPro: Was it only last year that you added luxury watches and fine jewelry?
Stephen Eggleston: Yes and no. We had jewelry and watches before last year, but it was 2018 when we decided to create a specific category focus around that sector. Obviously there are a number of the fashion brands — for example Gucci — that have their own jewelry and watch lines, and these were already selling on Farfetch. What developed last year was the fine watch and jewelry offering.
This was a relatively simple decision for us because of the potential size of the market. Plus we know our customers are buying these products and we want Farfetch to be a place where they can buy everything that they want. Finally, we see huge potential in the categories. While the watch sector is not in the same place as fashion in terms of digital penetration and online shopping, we feel the industry is heading that way at its own pace and digital touch points are rapidly developing for customers. We want to be part of that digital journey.
WatchPro: Do you think that the resistance you faced in the early days with fashion brands is similar to what you face now with watch brands?
Stephen Eggleston: We do not know how quickly watch brands will move, but the position is very similar to what José faced in the early days. Brands are reluctant and hesitant. They understand digital in different ways. Most of the watch brands I speak to, certainly the big watch groups, understand the importance of digital and ecommerce. They all know is it crucial to their future, they are just not sure how they are going to embrace it and work with it rather than fight it.
Some brands we speak to cannot wait to do more online, others tell us that they love Farfetch, but are not ready to sell online yet. Any yet, if you search for the brands that say they are not ready for online — and I don’t think I need to name names — you find them available to buy online in 10 different places in a totally uncontrolled way. It is all out there: grey market, certified pre-owned and brand new watches sold directly by retailers.
Brands need to start taking more control of this. Ecommerce is inevitable.
The other parallel we see with luxury fashion is around the types of brands and groups that exist around fine watches. There are a few major groups, often family-run still but huge conglomerates; there are some large independents that play a major role that are also still owned by families that have their own emotion and what they are used to and known all their lives. That is exactly how fashion was and is today.
We know we need to gain their confidence and gain trust with these great organizations and convince them that they can work with Farfetch as a relatively controlled channel to promote their brands to a totally different audience than they are used to.
WatchPro: The tension that watch brands run into is that they are used to working with retailers around the world that have territorial monopolies.
Stephen Eggleston: That is true. The existence of these selective distribution agreements for brands in certain regions is definitely a challenge, but we believe our model is appropriate for the luxury watch world. Right at the heart of some of the challenges facing the watch industry are pricing and distribution issues that are feeding the grey market.
Historically watch brands have thought things were going great as long as they were pushing watches into retailers in their target regions. They were very happy as long as their sell-in numbers were good. But then you have retailers who have got all of these watches but they are only allowed by the brands to sell into their specific territory. There was a total lack of visibility over the sell-out part of the equation.
This is creating this huge problem with grey market in the online world, which is essentially generated and sustained by imbalances in supply and demand.
Right at the heart of Farfetch, and any other marketplace like ours, is our ability to better understand and balance supply and demand. Having an unrivalled selection of products, which leads to an unrivalled selection of customers, is what we get to when we bring transparency and a solution to this imbalance between supply and demand. When you ring fence the available supply to a small addressable market, you limit the potential to succeed and you increase the risk of the grey market growing.
So, yes, our model will work incredibly well for the watch industry, but there are hurdles we need to get over to get there. Selective distribution or regionalized sales is definitely one of those hurdles.
WatchPro: Was it your experience that the fashion industry moved away from the sort of selective distribution agreements that we still see in the watch business?
Stephen Eggleston: It still exists, but fashion brands see the value of platforms like Farfetch to give them global reach. That is not true of all brands, but our model has proved to be very successful for wholesale retailers and the brands. Ultimately, brands are reliant on wholesale retail partners being healthy, so if we are able to connect more demand with the supply around the world; hopefully driving healthy sell-though at full price while still adhering to the brands’ demands around the way their watches are presented, then that becomes a successful and important part of the industry.
WatchPro: Do you have to work one country at a time, so if I am looking at Farfetch in the United States, will I see different stock to somebody in, for example, Europe?
Stephen Eggleston: That is possible, and it is something we can manage through the powerful underlying technology we have on behalf of our partners, if necessary. But the vast majority of our supply is sold globally because that is fundamental to the philosophy of the business.
WatchPro: Are new watches always sold at full recommended retail prices?
Stephen Eggleston: They likely will be, but it is not our role to control prices, that is down to the brands and our retail partners.
WatchPro: What I am trying to get to is whether there are barriers to growth for Farfetch in the watch industry that you have conquered in the fashion world over 10 years and therefore expect to overcome in the watch world? In reference to the previous question about selling across borders, I could not, as a UK authorised dealer in the UK, simply use Farfetch to sell watches in the United States. The brands would not allow that.
Stephen Eggleston: That’s true. The way we work with our partners in fine watches is in some ways the reverse of what we have done in fashion. With fashion, we started [listing stock] from the multibrand retailers and down the line started working directly with fashion brands. In watches, we have started working directly with watch brands. Most of the watches we sell today are direct from the brands. For example, we work with TAG Heuer directly, and the same with Bell & Ross. The reason we approached it that way is to do with trust. These brands are hesitant about what the online world means. For some, working with Farfetch is the first time their watches have ever been sold online.
We are able to integrate stock from all around the world for these brands. We might have Chinese, United States, UK and Swiss stock integrated on the platform. That gives us access to a lot of product that can be sold to a global audience.
WatchPro: Does Farfetch balance the stock flow from, for example, Asia to Europe for a brand like TAG Heuer, or does TAG decide how that is done?
Stephen Eggleston: TAG Heuer tends to manage the stock movement of its own watches and where they want them to be sold. We support them on that. For example, our analytics will tell us what styles customers in the United States are interested in, and we can advise TAG Heuer that those models will sell well there. We are always looking at matching supply to demand.
The reality is that we do see this industry evolving over time and becoming a freer flowing situation with stock around the world. I do not think it will happen immediately, but it will be crucial to address some of the fundamental challenges facing the industry, which is around distribution that does not match supply to demand.
WatchPro: Is the job now to encourage as many luxury watch brands as possible to work with you, or are you also focusing on building partnerships with retailers?
Stephen Eggleston: We have spoken to lots of watch brands and spent a lot of time with them. We know, having learned from the fashion industry, that building relationships is key. Even if they do not work with us in the first year or two, we want to be very close to them when trust has been built and they are ready. Gucci is an example of a company that did not work with us from day one, but we worked very closely with them to build trust and they eventually came on board.
The same goes for watch brands that we do not have. Whether we are talking Rolex, Patek Philippe, Audemars Piguet or the big groups like Swatch Group and LVMH, we are going to have to build confidence. It is really important for us to stay close to these guys and build trust.
We do need to bring these brands on board because the breadth of offering and the ability to offer unique products is absolutely central to our strategy.
WatchPro: Compared to fashion, your watch selection is tiny and it is mostly from minor players in the industry.
Stephen Eggleston: Watches is right at the start of its journey. We are trying to position ourselves in the right way with the brands, with the retailers, with our consumers. We have top tier customers, our private clients as we call them, who get a very tailored service from our personal shoppers.
Watches, along with jewelry, is one of the products that is asked for most by these clients. We are starting to invest heavily in that team [personal shoppers] in terms of training so that they can showcase everything about watches. We need to prove our expertise in this type of customer service, and that is what watch brands want to see from us. It is not just about putting watches online and hoping they sell. We are very active in working with our private clients. We have had some significant successes with private clients, including selling two watches worth over $200,000. That has given us confidence that we can sell watches at those prices.
One of the brands that has surprised me in terms of its success has been Ulysse Nardin. That is doing really well online. People are coming to us to look at their Freak Out watch because it is not available everywhere.
WatchPro: I would not say you are pushing water uphill, because that suggests you will never make progress, but I would say you are facing an uphill battle because the watch industry from both the brand and the retailer side is highly resistant to any business model that resembles the grey market.
Stephen Eggleston: That is one of the reasons why we have been speaking directly to more to brands than retailers. I have also experienced the way we are perceived changing over the past few years. When I first started going to these brands, they did not know who we were. Now, they are more open about speaking to us and attitudes of the most senior people within these organizations is evolving.
WatchPro: I hear of many conversations, but I do not sense that the majority of brands are any closer to working formally with secondary market companies.
Stephen Eggleston: That is a fair assessment, but speaking on behalf of Farfetch, a lot of watch brands are watching what we are doing with fashion and they are intrigued by it.
At a fundamental, structural, level with the watch industry, something has got to change. If it does not, the grey market will continue. They need to find a way to change that is positive, and in this way Farfetch as a platform will help them.
WatchPro: What is Farfetch’s view of the pre-owned watch market? Is that something you will move into?
Stephen Eggleston: I feel that the long term solution is a platform that offers new and pre-owned. The CEO of Audemars Piguet is starting to think about pre-owned as part of the same universe as new watches and they want to own and control it better. They are still going to need a platform for that, so that consumers are able to compare certified pre-owned watches next to brand new watches.
WatchPro: Audemars Piguet may want to get its arms around the pre-owned market for its watches, but it is making very little progress. Francois Bennahmias told me in January they have done little more than small pilots for certified pre-owned in Japan, but are running into huge logistical, financial and legal challenges scaling it into something world-wide.
Stephen Eggleston: We saw the challenge of cross-border logistics early on and have a fantastic logistics team headed up by our COO that deals with them so that the brands do not have to. They work with retailers and suppliers in 50 countries that are making their stock available in 190 countries with Farfetch taking care of all the logistics, duties, etc.
There are some brands we work with today where we sell all around the world and promote products in local currencies at fully-landed prices. More than logistics, which are a challenge, there are often existing commercial agreements that have to be accommodated. Those may need to be rethought at some point in the future.
WatchPro: How does the pace of growth for watches compare to other categories at Farfetch?
Stephen Eggleston: Different parts of the business are growing at different speeds, and that is all part of our plan. We believe watches is a big category that is ripe for disruption and we are here to support retailers and brands on that journey over the next 10 years.
WatchPro: Are you speaking to the smaller, high end independent watchmakers that might be making fewer than 100 watches per year? I would have thought they have most to gain from working with a platform like Farfetch that can give them access to customers in 190 countries without them ever having to worry about the cost, complexity and logistics of distribution to each of those countries.
Stephen Eggleston: That is certainly an area where we are focusing, and we spoke to a number of brands that fit your description at SIHH. We even held an event with one of them here in London with some of our private clients. They are likely to be some of the earliest movers, but we are focused across the board on brands that can move quickly and also those that will take a bit longer to become comfortable with the idea.
WatchPro: Is Farfetch an authorised dealer for the brands you sell, such as TAG Heuer and Ulysse Nardin?
Stephen Eggleston: No, we are a platform not a stockist. We do not own the watches that we sell and we do not have the capability to service them. The retailers we work with are authorised dealers for the brands, and they then sell through us.
Even if nothing changes; if selective distribution agreements remain in force and it is difficult to sell across borders because brands do not allow it, we have a technology platform that can accommodate that. We can work with TAG Heuer, for example, if it says that watches sold initially into the United States can only be sold in the United States. That is not optimal for our platform or our business model, which believes in balancing supply and demand globally, but it can be done. We are at a stage where we want to build trust, so if we have to regionalize stock for a time, then that is what we will do while we convince them of the benefits of not regionalizing.
WatchPro: Is one difference between fashion and fine watches the speed of stock turns?
Stephen Eggleston: It is very different. Fashion is far more seasonal. Also, the value of fine watches does not deteriorate rapidly after six months, in fact it might go up. But that does not change the fact that all of these businesses are commercial entities that need to keep selling watches and stock keeps turning. Within fine watches, there is a surprisingly small number of SKUs that account for an enormous percentage of revenue. That is true of fashion, but in fashion the product changes every season while watches do not change so much. That means we know what watches are going to be successful so we can target our efforts at making sure we are able to source those watches for our customers.
WatchPro: Market forces will ultimately come into play. If Farfetch is the greatest channel in the world to reach certain customers in certain parts of the world for brands that could not otherwise reach them, then the offer is compelling. That is not the case for the majority of brands making the highly desirable SKUs to which you just referred. They have highly successful authorised dealers, well-developed direct to consumer ecommerce, their own stores, or all three.
Stephen Eggleston: One of the things that Jose talks about is that Farfetch is not trying to replace existing sales channels, we are complementary. Consumers shop at different times in different ways, and there are different types of consumers. There might be somebody that really wants to go direct to a branded ecommerce website, but there are others that are totally loyal to Farfetch because they want to be inspired in a multibrand environment where they can compare how watches look.
Brands should built their own ecommerce businesses. We do not see that as a threat, we see it as a good sign that the watch industry is moving forward to a more digital future.
WatchPro: The tension is not so much with brands that already sell direct. These brands are already competing with their authorised dealers and those dealers have had to accept that. The greater tension is with brands that are loyal to their authorised dealers and do not want to compete with them.
Stephen Eggleston: That tension will continue to exist unless and until selective distribution agreements are loosened. These constraints are what create imbalances between supply and demand. One way to move things forward would be to allow the biggest retail groups to sell across borders, but that is much more complicated than working with us. How does Watches of Switzerland sell into China, for example? They need a platform that can help them drive volume. We would love to be that platform.
We would love to work with Patek Philippe, Audemars Piguet, Watches of Switzerland, Bucherer and the big pre-owned players. That is the dream. We are not there yet, but we are the only player positioned to deliver on the platform, the technology, the global reach that will help the industry as a whole to balance supply and demand for watches.