Online luxury fashion retailer Cettire (CTT) has been a post-IPO success story. But a recent article in the Australian Financial Review questioned the company’s business model.
Forager Australian Shares Fund Senior Analyst, Alex Shevelev, speaks with Chloe Stokes, Analyst on the International Shares Fund. They discuss Cettire’s business model in comparison to the online luxury fashion gorilla Farfetch (NYSE:FTCH).
Hi everybody, my name is Alex Shevelev, Senior Analyst on the Australian Shares Fund here at Forager Funds. Today we’re here for a very special crossover video between the Australian Shares Fund and the International Shares Fund at Forager and representing the International Shares Fund, Analyst, Chloe Stokes.
Today we’re going to be talking about a very topical business. So Cettire is an online fashion retailer. It’s had an amazing post IPO run, the business IPO-ed at 50 cents. Then within six months was trading at $2.85. We’re talking about a market cap in order of $1.1 billion, which is very significant for business that was really only founded in 2017.
Now it’s been a little bit controversial in the last week, because what we saw on Saturday was an article in the Australian Financial Review that questioned a couple of aspects about the business, some of which we will come to soon. The share price promptly dropped 21% when the market opened on Tuesday and the company published a defense of itself. The share price subsequently rallied slightly. Now I can’t say that I’m a particularly big buyer of Prada. So Chloe, our luxury analyst and who’s responsible for a similar business on the International Shares Fund is joining us today to talk through the business model of these businesses.
So we owned Farfetch in the International Shares Fund, and we made a lot of money out of it last year. Farfetch is the global platform for the luxury industry and first I’ll just touch on its business model. So the purpose of Farfetch is to connect customers in more than 190 countries with products that are located in more than 50 countries. They do that through working with more than 1300 suppliers, which are brands, boutiques or department stores. So essentially Farfetch gets the eyeballs on its website and it’s responsible for providing a seamless customer experience and it also takes care of things like distribution. Now, it sounds like the Cetttire has quite a similar business model to that, but the one big difference that I’ve noted is the way that they source the products.
This has been one of those controversial points that came out in the AFR article and it’s sort of been questioned since. Can you shine some light on how Farfetch specifically does the sourcing and how Cettire might differ from that?
Yes, so neither of the companies take on inventory risks. What they do is Farfetch works with the brands and the boutiques. They create the website and the brands are responsible for allocating which products they’d like on the website and they also dictate the pricing for those products. Whereas the Cettire seems to deal with distributors, and it looks like they are choosing different prices for different products. Whenever I searched for a designer product on Google, Cettire will often be the cheapest and sometimes it’s by a pretty significant margin. And you might think that’s really great from a consumer perspective, which it is. However, for these luxury brands, selling things at full price is really important. They don’t want to devalue their brand by constantly having their products discounted online, where consumers can see it and they might wonder, ‘why would I then bother paying full price for these items in the future?’.
So how do you transition here from Cettire that sources mostly from distributors, to a business that can scale and source more from brands.
So I think what they’d need to do is develop some relationships with those brands, which if they can prove that they’re bringing the eyeballs and the customers, and I’m sure they won’t have any problem with that. However, I guess the one change would be that those brands would want to dictate their own pricing or at least have some parameters around what Cettire can do with pricing. Then what we’ll see is whether they can actually compete on things like marketing and technology against bigger players in the space without having that price advantage that they often seem to have.
Thank you Chloe and thank you for listening in. It’s been an interesting week for Cettire and we hope that you join us for further updates from Forager.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.