We're gonna go ahead and get started. I'm Douglas Anmuth, J.P. Morgan's internet analyst. We're pleased to have with us today José Neves, Founder and CEO of Farfetch. Farfetch is the leading global platform for the luxury fashion industry and is driving luxury e-commerce penetration. Farfetch Marketplace connects more than 1,400 luxury sellers with almost four million active consumers across 190 countries. Farfetch also has a first-party business and has built out e-commerce enablement through Platform Solutions. Last year, the company did more than $4 billion of GMV through the platform and, looking forward, targeting $10 billion of GMV and low double-digit Adjusted EBITDA margins by 2025. José founded the business in 2008, really stemming from his background across both fashion and technology. Welcome, José.
Thank you. Thank you, Doug. Thank you for having me.
All right. Let's see, 2022, was a challenging year in lots of respects, just in general. You know, for you guys, Russia, China lockdowns, FX pressures, heavy promotional environment. You just reported 1Q earnings last week. How are you feeling about the business in 2023?
We're feeling very confident. I think, maybe taking a step back and looking at the bigger picture, I think luxury has proven to be an extremely resilient industry. In the last three years, so between 2019 and 2022, the industry grew 8% on a CAGR basis, which I think is very impressive given that 80% of luxury sales still happen in physical stores, and the stores were open and closed, you know, throughout the world. Clocking that 8% growth was another proof that this industry is a very resilient industry. In the same period of time, Farfetch grew 24% on a CAGR basis.
Whilst 2022 was a challenging year, Russia was our third largest market, we decided to stop trade in Russia after the invasion of Ukraine. China is our second largest market, and due to the very austere lockdown measures that that country went into, double-digit negative growth. In spite of all of that, we over the three years period, we acquired market share consistently. In fact, the underlying business outside of these macro factors remains very strong. In Q1, we grew others by 18%, excluding Russia and China, and we accelerated in every single market. China is now back into positive growth quarter to date.
The U.S., we saw an acceleration, although still in negative territory, year-on-year, but positive net new customers, around 9%, 7% increase in orders in the U.S. market. We see that the underlying business continues to demonstrate a lot of strength. As we comp over Russia and China, FX, which was a very significant headwind for us, we're very confident that that bodes well for our plans for the rest of 2023.
Okay. Great. Maybe just thinking about the U.S. business. A number of luxury players have called out some of the weaker trends in the U.S. Also, of course, you've also talked about a heavier promotional environment, a little bit more weakness among aspirational customers. I guess what gives you the confidence in the U.S. business kinda stabilizing and growing more in the back half?
Look, I think, I think first of all, we have a very small market share in the U.S. The U.S. luxury industry is depending, some analysts point to $120 billion. Let's use that number. We're give or take 1% of market share. Online, it would be 5% of market share. It's a very small market share. Farfetch is... I think this is important to understand the competitive dynamics and potential of the business. We're the only platform business catering for this $360 billion industry. What I mean with that is that everyone else is a retailer, either a boutique that become a retailer or a department store.
You know, Amazon has tried to enter the luxury space a few times. Amazon Luxury Stores was, I think, two, three years ago, was the last attempt. They haven't really been successful at entering this space. Farfetch stands alone as the only marketplace model and true platform model catering for what is a very resilient, attractive, very large industry. The fundamentals in terms of us being able to capture market share in the US and grow our US business in the medium and long term, I think are very solid. I think you talk about the aspirational customer, and we'll get there, but I think we also have the Private Client customer. This is the VIP customer. It's the largest VIP business in the world.
We do over $1 billion with 1% of our customers, which account for 27% of our sales. These are around 35,000 customers in total. This is globally. In U.S. it's a fraction of that. Now we know that department stores typically have 100,000 VIP customers if you use exactly the same metrics to classify them. We're only scratching the surface. We could grow our Private Client base in the U.S., you know, tenfold. We believe that that segment is very resilient. We continue to see average order values very stable at $1,100 for our Private Client. We continue to see the average spend per customer around $40,000.
We continue to see very high retention rate, 90% retention rate on that, on that top tier of customers. The more aspirational customer, obviously we're gonna continue to stay vigilant in terms of how the macro evolves in the U.S., and we knew that beginning this year already, that we've been saying since Q3 that the market is becoming promotional. We saw inventory build up in all the luxury retailers, which we knew this always leads to promotional activity. That obviously attracts the aspirational customer and much more than the rest of the business. In terms of the aspirational customer, I think, we still see net new additions of customers.
Farfetch is one of the very few e-commerce businesses that went through COVID, 2020, 2021, 2022, and Q1 2023, and never in a single quarter we lost active customers, including losing Russia, which was 350,000 customers. We have four million customers in total, 350,000 is a significant number. In the U.S., we continued to add customers in spite of pulling back on advertising in the U.S. to the tune of 20% this last quarter because of the promotional activity. We don't want to focus on profitability this year. We're still adding customers. That to me demonstrates that there is demand.
The aspirational customer is shopping. They're trading down. They're shopping, they're taking opportunity to benefit from the promotions that are out there. They are around, and this is a very resilient category. As we see the rest of the year continue, I think in Q3, Q4, we will comp over our decision to pull back 20% in terms of advertising expenditure in the U.S. as a percentage of revenue. That will comp in Q3, Q4. As we continue to see this organic growth in terms of number of customers, the also the, you know, the dynamics in terms of our own clearing through our own 1P inventory will improve, as Q3, Q4.
All in all, we took a very balanced view, in the beginning of the year when we set our plans. There's no reason... I mean, we continue to be very confident with that view, including U.S.
Okay, great. Let's shift gears a little bit, talk about, talk about China. You talked about a return to growth quarter to date. It still kind of feels like recovery in China is a bit slow or choppy, and I just mean broader kind of overall recovery there. If you can talk about how the business is trending on a multi-year basis, how you're thinking about timing to a more complete recovery.
I think, you know, first of all, China is going to be potentially the largest luxury goods market in the world. Most luxury analysts, they point to that outcome in a few years' time, certainly by 2030. It has been the engine of growth for the industry. Actually currently now in Q1 and Q2, it has been the engine of growth as things start to come back to normal in that country. A few things that are very exciting for us. First of all, online penetration of luxury in China is very low. It's around 10%. In the U.S., it's above 20%. This is very interesting because China typically has higher online penetration.
If we look at online penetration of e-commerce, it's 50% generally in China, it's even higher than in the US. This is a category that because of the barriers to entry, the difficulty that brands have, the luxury brands have reaching the customer, Chinese customer digitally, and the fact that we're, you know, there's very high barriers to entry for Western players in that industry. You know, there's this, you know, restriction in terms of supply, which is very good news because as we bring more supply into that market, we think we're in a very good position to capture that. I mean, the last thing that excites us a lot. Is that we're really the only company, the only Western company that is succeeding in China in our space.
Even in e-commerce, there are not many companies that have been successful in that market. We've been investing for eight years now, so we have a fantastic team on the ground, incredibly localized app, services, Private Client services, you know, local marketing presence in the various platforms. We have a partnership with Tmall. We have our own storefront on the Tmall Luxury Pavilion app. The two largest online luxury platforms in China are Tmall as domestic player and Farfetch as a Western player. This is a very good position to be in, and I think that makes us even more strategic for our brands, the brands that sell and the retailers that use our platform to reach global fashion customers.
I think this bodes really well in terms of the expansion of that opportunity in China in years to come. I think this year the good news is we're back to growth. I think, you know, it will take time. I mean, this year we're not forecasting a return to the 2021 levels of business there. 2022, we were double-digit negative in that market. I think this year we will recover part of that territory. But we're not needing to go into the 2021 levels to deliver on what are our expectations for this year. We're very confident. I was in China just, you know, 10 days ago, spent a week there.
It's clear that there's strong appetite for luxury in that market. Things are back to normal. No one's wearing masks. Everyone is, you know, I went to Plaza 66, which is the local shopping mall, the top shopping mall for luxury brands, and there were people queuing out of the Louis Vuitton store, and that store has 40,000 sq ft over three levels, so not bad. And the same thing with Gucci, the same thing with Saint Laurent. I saw a lot of appetite for luxury, so it's definitely coming back. Of course, you see the luxury brands, the comps are completely all over the show because last year, this time last year, they were all closed, those stores, right? Of course, you're gonna see likeness.
Plus 40%, plus 60%, you know, whereas Farfetch, we continued, although it went down, but we continued obviously to service the customer in, to some extent. So yeah, we're very bullish in terms of China in the medium long term. The projections for this year, we think we're, you know, delivering to plan or maybe a little bit slightly ahead of plan.
Okay, great. We think about the business, marketplace was initially built around boutiques. Over the last several years, your relationships with brands, of course, have grown very strong. Maybe you can talk about that a little bit. You know, maybe give us a sense of kind of mix of, either inventory or GMV that you're seeing on the platform between brands and boutiques and how you think that trend's going forward.
Supply is growing very fast, so the supply from our top 20 brands grew 60% in Q1 year-on-year, which is staggering growth. Retention of sellers is typically in our business, almost close to 100%. We have consistently retained both the boutiques and the brands that have joined the platform. We're a very curated marketplace, you don't have a page like, add your boutique to Farfetch or add your brand to Farfetch. We will find you, we will choose you and approach you. This curation of the marketplace means that the brands trust us and the consumers trust us.
What we've been seeing is a gradual but consistent deepening of the relationships we have with both the brands and boutiques. Right now we have 800 luxury retailers using the platform. Some are very, very large. Some are department stores, multi-billion department stores. Others are just, you know, the best, you know, local neighborhood boutiques, luxury boutiques. I know we have some in Boston. I forgot the name now. I should have prepared it. It's really crème de la crème of luxury retail. That's in terms of the retailers. In terms of the brands, we have 600 brands directly on the platform, from the Guccis, Pradas, Burberrys, Saint Laurents, 600 of them, so Brunello Cucinellis, et cetera, et cetera.
This is a relationship we built over 15 years, so we see that relationship, deepening. I think to your question, the brands are becoming a much larger part of our business, as you would expect. That 60% growth in inventory that I mentioned is mostly vast majority coming from brands, not boutiques. Right now it's over more than 50% of the supply, that we have available to sell on Farfetch is coming directly from the brands.
Okay, great. Let's talk about platform business, which is really evolving very quickly. I guess if you think about how you're building out platform relationships, you know Reebok is a big one this year. Maybe you can just talk about how you're working with Reebok in Europe, kind of multiple ways, and also a little bit about how this gets recognized through the P&L.
The brand platform business in particular.
well, let's-
Farfetch Platform Solutions.
Sorry. Let's talk Reebok.
Reebok in particular.
... relationship overall. Yeah.
Yeah, sure. I think, you know, we identified four years ago, we identified that certain brands and certain creators and collaborations were driving a disproportionate amount of hype and buzz and cultural relevance. For us, it became clear that to really build a Farfetch brand and to build the engagement with the customer in an even more powerful way, we could benefit from having that direct access from brands directly to consumer through our platform. It's a bit like the Netflix strategy. It's creating original content that then differentiates the platform, which then lowers the customer acquisition and retention costs. Obviously, it's a small part of our business, and it will remain a small part of our business, but an important one.
To give you an idea, the biggest traffic day we ever had on Farfetch was an Off-White Nike collaboration, a drop where we had 800 million visits in a couple of hours. That's 10% of the world population, without $1 spent in marketing. Consistently, we've seen these type of collaborations and this type of cultural relevance really bring a lot of engagement and, you know, app installs and new customers to the platform. That's the background in terms of our acquisition of MGG, which is a platform that creates brands from zero. Off-White was created from zero to multi-hundred million. Palm Angels was created from zero to, you know, well over 100 million. Reebok comes in that context.
For us, the opportunity when we saw that Adidas had sold Reebok to ABG, that is a brand that is, you know, a heritage brand. It's actually older than Nike and older than Adidas. It has been a brand that was responsible for many of the innovations, in terms of sneakers. Those old enough to remember the pumps, they were pretty cool. The archive is phenomenal. It's a really fantastic archive, and they haven't done much with it. We really believe that bringing back these iconic styles, you know, and pair them with cultural relevant collaborators, can really build a very exciting, you know, business for sneakerheads and for, you know, our customer who's a fashion enthusiast. That's the whole plan.
We also took the European license for the... That license is global, so we will, from 2024, we will start launching these archive products, these collaborations, which we think will be... It's a good moment because I think it's a moment where in the sneaker market, people are looking for, you know, new hits and new concepts that, you know, really change the game there. That's a global license that we have with ABG for... It will be in 2024. What we launched already in 2023 is the European license for the full, for the full spectrum of the brands, including the more mainstream.
That was historically a $500 million brand under Adidas in Europe, and that's what we launched just a few weeks ago. We did that because we believe that controlling the distribution in Reebok, the British brand, so controlling it in the core market, it's important to then build the global hype for the brand. We're excited with the team we've built. The CEO that is running Reebok was 25 years at Nike. He started. He was part of the core founding team of the Nike Energy Program. With all these collaborations, we got to know him via the Off-White collaboration, convinced him to move from Portland to Milan.
He's built a team around him of ex-Nike, ex-Adidas, some ex-Reebok from the team that was in that business already. We think we have the right talent, the right team, and we're excited. We've just launched it. That's where it sits. The impact this year is between $250 million and $350 million, and it will be seen both in the brand platform, which is where we book the wholesale sales of Reebok, and in the digital platform, which where we'll book the digital sales of Reebok. From that $250 to $350, you'll see the impact on those two parts of the reportage segment.
Got it. Okay. You've talked about there are some investments you need to make to get this business really going. You've talked about $170 million, perhaps maybe not all of that is for Reebok. I think certainly the majority, but how is that kind of transition going and just building out all the infrastructure that you need to there?
It's going really well. We've built a team with the warehouses. We never, you know, own warehouses, it's three PLs, but obviously you have a certain cost in terms of setting them up and paying for the, you know, the ramp-up of the logistics. Sales and marketing team, design team. You know, everything that you would expect to run a business at that scale. We've done it in a very disciplined way and conscious of the current environment that we live in. Profitability and cash generation are our absolute priority this year. In fact, we have reduced our like-for-like fixed cost base around 10% year-on-year.
From $850 million of SG&A spend last year, we're going to cut $85 million thanks to the headcount reductions that we've already made last year. This is not new stuff. This is things that, we've implemented last year and that will have a full effect, in 2023. The costs that we've built, to run these significant, you know, sizable, businesses, are being built up in a gradual and very disciplined way, it's progressing well.
Okay, great. two other, new partnerships, hoping you could just talk about what you're doing there, perhaps timing and impact. Ferragamo recently launched, and then also Bergdorf within Neiman Marcus in the back half of the year.
Yeah, we're on track, on schedule, on budget with all of those. We have a very strong track record of enterprise level large launches. With, with Harrods we delivered absolutely to the day. Actually, Michael Ward, the CEO, we have a testimonial that we use all the time because he was very kind to us, and he said, "First time I delivered a project of this size to the day that we said we were going to launch it and absolutely on budget." We did the same with Tmall. When, when they invested in Farfetch, and we launched the Tmall Star. We actually did it ahead of time, and many others. We've, we have this consistent track record. Again, this year with Ferragamo, you know, we launched already.
Reebok launched. Bergdorf Goodman is absolutely on track for second half of this year. We have the Richemont transaction, which is going through regulatory approval.
Mm-hmm.
We expect to have the regulatory approval until the end of this year. After that, we will be allowed to accelerate the build of those websites and launch cartier.com, which will be the first and the largest maison within the Richemont group, as well as Net-a-Porter, which is the largest within the YNAP group, in the first half of 2024, then all the other maisons after that.
Okay. Let's stick with Richemont and YNAP. I guess curious, what can you do just from a, you know, kind of not just pre-planning, but perhaps system-wise, operationally, you know, what can you do kind of while you're in this interim, you know, approval period to get ready? Then I guess second, how do you think about tackling more on the hard luxury and jewelry TAM, you know, part of the business? I think it's 25% or so of global luxury overall, but this gives you a much stronger, you know, kind of position in that business.
Absolutely. I think, yeah, you know, hard luxury, we have the customer, certainly. Our record sales have been watches, actually. We sold couple of watches for around $2.5 million. One was Tiffany Patek Philippe, the other was a Richard Mille watch. I mean, we really have the customer that is willing to buy. We also, fine jewelry. We've sold fine jewelry sets for $1 million, et cetera. We don't have the supply. The reason why we don't have the supply is that traditionally the fine jewelry and watch brands have been even slower than the fashion brands to embrace online. I think Richemont is an absolute breakthrough for us because our competitors. These brands, they don't sell wholesale.
Cartier, for example, Van Cleef & Arpels, they just don't do wholesale. Because they don't do wholesale, they're not present in the competition, 'cause again, our competition is all, you know, department stores or retailers. That gives us an incredible opportunity to really become the destination for hard luxury online. So we have a plan, a strategic plan in 2024 to really push that category, which is 25% of the industry, but it's only around 2% of our supply. So, it's a supply constraint. We absolutely have the customer, we have the demand and the desire to buy these brands. With this deal, I think we unlock the largest player in the category.
That is already leading to very interesting conversations with other watch and hard luxury players in the industry that, "You have Richemont. Oh, interesting. What are you doing with them?" You know, "What are you building here?" We're building this hard luxury hub. We think it's gonna be great news for the customer and a potential expansion, you know, avenue for us.
Okay. Maybe just shifting to profitability. You know, it's clear you've been driving some strong efficiencies in your demand generation spending over the past few quarters. Could you just talk about how you've gained leverage there? I guess, is it sustainable in a stronger macro environment or how will you lean in perhaps again as the environment improves?
I think, you know, we plan to continue to be disciplined in terms of the demand generation spend. We think around 7-7.5% of GMV is the right way to think of it, which is down year-on-year materially. Now, I think in terms of profitability and cash generation is our number one priority. With my team, I did this exercise, 10 battles we can't lose. Number one is profit and cash. For us it's very important. It's not something Farfetch hasn't achieved before. We were adjusted EBITA profitable, not a lot, but we were in 2021, and we were operational cash flow positive in 2020. This is a business that two things need to happen.
We have to stabilize 1P, the 3P marketplace business needs to grow. It doesn't need to grow a lot, but needs to grow. That cash generation, because we have a advantageous working capital cycle with the 3P, it more than offsets the interest expense and the CapEx. You saw that in 2020 and in 2021, we delivered adjusted EBITA profitability. This is not. You know, some companies have never turned an EBITA profitable or cash, and they're now trying to position themselves in that way. We've done that before. We have to go back to those days. We're doing it with much more discipline than what we had in the past. I think we're gonna look back in 2022.
I said this to you today, just came up to my head. I think we're gonna look back in 2022 and say it was the best thing that happened to us, because I think it was the permission and the necessity to be disciplined with the cost base and really squeeze more efficiency out of the business. I think the combination of that allows us to look at 2023 with strong confidence that we're going to deliver in those targets. In terms of cash, we believe that we're going to end the year with more cash than or the same cash than what we started. That's the target. We have several levers to achieve that. One is obviously the normalization of our inventory.
The other, we have things like we at the moment, we have a buildup of $220 million of money owed to us by governments in the European Union. I won't bother the audience with VAT tax refunds in the European Union. It's a fascinating topic. To cut a long story short, we're owed tax refunds from these 27 governments. We could take them off balance sheet on $0.95 on the dollar or whatnot. They're very high quality receivables. We have started to receive money from these authorities. After Brexit, there was a very long delay. This is now starting to become more regular.
We believe that a lot of that receivable is going to be converted into cash or at least a material portion of it this year. Into 2024, we'll get on a more decent cycle, let's call it this way. In terms of being paid from these tax refunds. There are elements of the balance sheet which either are going to be normalized or are going to be converted in cash. That together with the positive working capital dynamics, as we go back to growth, we believe that that second objective is in sight and we're very focused on it.
Okay. Real super quick, word association, whatever comes to mind. demand generation.
Save money.
Macro.
Uncontrollable.
US.
Great opportunity.
Palm Angels.
Maverick brand.
YNAP, Richemont.
future potential.
China.
You know, golden opportunity. I'm using two words.
That's second's allowed no more.
I'm cheating. I'm cheating.
E-concessions.
Farfetch invention.
Private Client.
Our core customer.
EBITDA profit and free cash flow.
Insight.
Luxury online.
Farfetch.
All right. Great. Thank you.
Thank you very much.