Farfetch Limited (NYSE:FTCH) Q2 2020 Earnings Conference Call August 13, 2020 4:30 AM ET
Alice Ryder – Investor Relations
Jose Neves – Chief Executive Officer
Elliot Jordan – Chief Financial Officer
Conference Call Participants
Oliver Chen – Cowen
Louise Singlehurst – Goldman Sachs
Eric Sheridan – UBS
Jason Helfstein – Oppenheimer
Doug Anmuth – JPMorgan
Good afternoon. My name is Rob, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Farfetch Second Quarter 2020 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remark, there will be a question-and-answer session. [Operator Instructions] 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.
Hello, and welcome to Farfetch’s second quarter 2020 conference call. Joining me today to discuss our results are Jose Neves, our Founder, Chair and Chief Executive Officer; and Elliot Jordan, our Chief Financial 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 section 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.
Thank you, Alice, and thank you all for joining us today. I’m very pleased to be speaking to you about our results for Q2, 2020. Group GMV grew 48% to $721 million, driven by digital platform GMV acceleration to record $651 million, a 34% or 39% on a constant currency basis.
As well as the addition of brand platform GMV, following the acquisition of New Guards in Q3 2019. Last quarter I outlined six key differentiating advantages which position Farfetch to emerge from the COVID-19 situation even stronger and our outstanding Q2 results clearly demonstrates that they’re playing out as the industry and the goals what I believe is a major acceleration of the sustained online adoption we has been anticipating since in founding Farfetch 13 years ago.
First, our business model has proven to be truly resilient, as we have continues to be able to serve our brands, retailers and consumers since the onset of the pandemic, with no material disruption, while also prioritizing the health and well being of our employees, partners and customers.
Second, our market leading digital platform has enabled us to leverage our reach across our 190 markets and capitalize on our stronger share of voice by investing in regions where our programmatic marketing algorithms detected demand by consumers who were shifting their shopping online.
As a result, we delivered a record level of transactions during the quarter as we acquired our largest ever cohort of over half a million new customers. And more than doubled year-over-year app installs. This is particularly valuable as our mobile app customers have historically exhibited higher LTVs.
Additionally, with access now up to 2 million members, we now had 80% of our active consumers enrolled in our loyalty program. This present significant opportunity for us to fuel our future growth by driving engagement and sustained repurchase through loyalty initiatives for our expanded consumer base.
Third, our expertise and localized operations in China and other key markets allow us to offer luxury consumers the best of those worlds by enabling them to shop a global supply of luxury fashion from 3500 of the best friends via net and website in their native language, supporting their preferred payment methods and for our private clients via a local stylist who is attuned to their local type style.
As a result, we have seen our markets across EMEA, including major European countries and the Middle East, as well as markets in APEC and the Americas, such as Mainland China and Mexico outpace our overall marketplace growth as tourism shopping demand is being repatriated in light of continuing restrictions and concerns around international travel.
Additionally, in the U.S., which grew slower than the overall marketplace in Q2, we saw encouraging signs of demand picking up as growth began to accelerate at the end of the quarter. Fourth, our unique e-concession model is helping even more brands, boutiques and department stores navigate this unprecedented situation.
In fact in Q2 our top 20 direct branded partners together saw a doubling of the direct-to-consumer or e-concession sales on the Farfetch marketplace as compared to Q2 2019. And we continue to maintain 100% retention of our top 100 brands and our top 100 retailers.
With a significant shift of consumer demand online since the onset of COVID-19 brands and retailers focus on digital channels has intensified in Q2. And we have expanded our partnerships to nearly 1,300 third-party sellers now the participating on the Farfetch marketplace, including more than 500 brands and over 750 retailers.
We’re also looking forward to bringing selections from renowned French department store, Printemps, among others signed recently onto the Farfetch marketplace. In addition to seeing strong interest from new partners, existing sellers have leaned into the marketplace proposition, resulting in our highest average SKU count and that’s of inventory in Q2 and more sellers offering each SKU, which further increases our geo-diversity, a key advantage in our ability to continue operating throughout COVID-19 related closures.
Another benefit from the stronger relationships we’ve had developed with brands has been ramping up of opportunity for us to partner on exclusive collabs, which offer a way to showcase their brands and also drive further differentiation of the Farfetch marketplace with consumers.
Recently, our consumers have had exclusive access to exciting collections from Gucci’s first circular collection, Burberry’s Summer Monogram Capsule and Marni’s homeware collection.
We also established an ongoing exclusive relationship to be the sole multi brand online channel for Rihanna’s label, Fenty, which marks our six LVMH direct brand relationship across the Farfetch Group. And we are continuing to explore opportunities to strategically partner with mega brands, seeking to increase their direct-to-consumer distribution via a multi brand e-concession.
Fifth, differentiating advantage lies in Farfetch Platform Solution or SPS, the enterprise solution side of our business. We pleased to see that SPS is firing on all cylinders across both our longest standing, as well as our new partners as we enable their continued operations, even as their stores remain closed.
GMV for FPS clients with one-year or longer tenure grew faster than the Farfetch marketplace, reflecting a broad based shift to online across the industry, including by brand loyal consumers.
Additionally, our launch of Harrods re-platform e-commerce business in February, also drove significant GMV growth for SPS and contributed to the acceleration of digital platform GMV in Q2, our first full quarter reflecting this partnership.
We are pleased to have deliver strong than expected growth for the iconic department store and to have enable them to continue serving their global consumer base while their next reach location was closed for most of Q2.
Finally our augmented retail initiative which we have been developing through our exclusive partnership with Chanel over the past three years are expected to be even more critical for brick-and-mortar luxury as leading brands seek to optimize sales per square foot in a lower traffic both COVID-19 environment.
We look forward to unveiling the next generation of our solutions to help critical retailers enable an enjoyable and personalized new normal shopping experience. We plan to launch our revolutionary star of the future experience in our own ground smashing boutique towards the end of this year, which will be an exciting ongoing demonstration of the capabilities we have been developing.
Turning now to New Guards, which just celebrating its one year anniversary as part of the Farfetch family. In last August, the Farfetch and New Guards team have been working closely to advance the three key tenants of our collective brand platform vision and strategy. And we been thrilled with the execution to-date.
First, towards our initiative to increase the mix of high margin direct-to-consumer revenue across New Guards band portfolio, we have fully integrated brands into our fulfillment by Farfetch facility to enable sales science Farfetch marketplace. And SPS has began replatforming their nine brand.com sites to enable their monobrand channels.
Additionally, we have taken proactive actions to reduce or eliminate product allocations to non-strategic online wholesale partners in our efforts to prioritize long term brand value over short tem revenues.
These efforts have significantly increased the mix of online direct-to-consumer revenue from 2% at the time of the acquisition to 19% in Q2. And we see opportunity to continue to increase this mix by further leverage New Guards unique merchandizing approach in combination with the digital capabilities of the Farfetch platform.
We have also seen New Guards brand bring cultural relevance to the Farfetch brand and deliver a strong halo effect on the other 3,500 brands available on the marketplace. In Q2 the number baskets with both a New Guards item and then item from another brand doubled year-over-year.
And when the most recent Off-White Air Jordan collab sale drop last month, it sold out within the first hour, and generated 800 million hits during that time with no marketing spend.
Finally, we have made progress in continuing to expand existing brands and building new brands of the future to driver long term growth. We’re pleased to see Palm Angels has now moved into the top 20 brands on the Farfetch marketplace based on GMV and Ambush, a Q1 addition to the brand portfolio has already gain recognition as a next generation brand and cultural pioneer by Lyst and Highsnobiety.
I’d also like to take a moment to address the important development behind the global contraction to fight for racial equality. I believe Black Lives Matter. And that Farfetch has responsibility to help eradicate systemic races in society starting from within.
Over the cost of the past month, we have had open conversations with our black employee network and across our business. And what we can clear is that we have a lot ot learn and a lot to do to support and champion our black colleagues.
Farfetch is a company of action, not just sentiment. Beyond donating money to important causes on this front, some examples of the actions we have already taken includes; implementing training and career development program, establishing a global diversity and inclusion team to driver our asset across the business, amplifying the black fashion community across our platform, and becoming an inaugural member of the Black In-fashion Council, an organization focused on advancing black representation at every level including the C-suite of the fashion and beauty industry.
We remain committed to driving change and results at all levels of our business. This includes our board of directors where we also improves representation. Additionally, we have created a new ESG Committee of the board, which will be dedicated to overseeing our efforts around sustainability, social responsibility and governance, as well as our diversity and inclusion initiatives.
We are just at the beginning, but we are committed to continuing to listen and learn and to work towards creating positive change for the future. I would also like to take a moment to outline about evolution we’ve announced today. These changes reflect the planning, the board and the nominating corporate governance committee have undertaken in anticipation of the natural evolution we expected following our IPO.
With a view of ensuring continued strong governance and support of Farfetch to our next chapter of growth. I am delighted that Stephanie Horton, Dana Evan, Victor Luis and Gillian Tans have agreed to join the Farfetch Board of Directors, which brings valuable perspective and complementary skill set across key areas including technology, fashion and finance.
I am excited to work with the new directors and the entire Farfetch Board as we continue to solidify our position as the global platform for the luxury industry and maximize shareholder value.
At the same time, I’d like to thank the departing directors for their many contributions to the company over the past several years. Each has played a significant role in Farfetch’s success in chapter one, and I am grateful for their leadership.
Finally, I’d like to say a special thank you to my co-chair Natalie Massenet. Natalie brought incredible wisdom and keen insights to the board over the past three years and a half and played an invaluable role in Farfetch’s growth and transformation, particularly in relation to our focus on putting the customer at the heart of everything we do. Natalie and the other departing directors leave us with our very warmest wishes and thanks
And now, I’d like to turn the call over to Elliot for the financial Review.
Thank you, Jose and hello everyone. As Jose has been describing, the Farfetch platform has excelled over the last quarter. And I’m pleased to share the financial results of the Group, which reflect this very strong performance and position moving forward.
Across the group, GMV grew 48% year-on-year to $721 million, adjusted revenue increased 70% year-on-year to $308 million, adjusted EBITDA, our measure of underlying profitability, improved $12 million or 33% compared to Q2 2019 to minus $25 million, taken our EBITDA margin to minus 8%.
And our cash position closed the quarter at just over $100 million boosted by the $390 million of net proceeds from the issue of convertible debt we execute in April, but also reflecting a significantly reduced underlying cash burn of just $12 million across the quarter.
It’s also worth highlighting that our combined tick general and admin costs were held flat between Q1 and Q2 of 2020, whilst the group added $110 million of GMV between the two quarters. These results show we are making excellent progress in driving growth on the platform expanding unit economic and delivering operating cost leverage. Our goal of achieving adjusted EBITDA profitability across 2021 is another step closer.
I’d like to share some specific insights about the Q2 performance from our three business segments. First, our digital platform, which enables global third-party transactions across our multi brand marketplaces, branded e-commerce solutions by our Farfetch platform solutions offering and the sale of first-party product from the buying teams at Browns and first-party original products created by New Guards.
This platform delivered GMV of $651 million representing 34% year-on-year growth based on reported results, and 39% versus last year on a constant currency basis. This growth was underpinned by the highest number of new customers gained in a single quarter on the marketplace, with over half a million people shopping with Farfetch for the very first time.
This drove the share of GMV from new customers to levels we have not seen since 2017 and was achieved despite the cost of acquiring these customers on a per customer basis, being down 30% year-on-year.
The digital platform GMV also included a full quarter of trade from our clients, Harrods, as well as strong growth in our direct-to-consumer proposition for our own brands, developed by New Guards across the marketplace, and via branded websites powered by our digital platform.
Finally, we thought strong support for our hashtag support boutiques campaign at the start of the quarter, and growth about full-price offering across May and June. Overall, 86% of GMV is from third-party sellers on the platform at a take rate of 29.9%, consistent with Q1, and 14% of GMV is from sales of product on a third-party basis, which continues to grow stronger than the overall platform driven by growth of the first -party original business coming from the New Guards brands.
As a result, digital platform services revenue grew slightly ahead of GMV at 35% year-on-year to $238 million. Looking specifically at the Farfetch marketplace. As I said before, we had over half a million new customers within the quarter, without research telling us that the vast majority of these new customers are shopping more online as a response to the pandemic.
Overall traffic grew more than 60% year-on-year, and app installs more than doubled year on year. Our average order value decreased 18% year-on-year to $493, due to the high mix of first time orders, which tend to have lower average order values. The COVID-19 related mix effect towards lower price point categories and currency headwinds.
Our full-price mix increased year on year despite the marked down levels we’ve seen externally across the industry. And we’ve significantly reduced our level of promotional overlays to the trading calendar with fewer discounting events and fewer free shipping campaigns during this Q2 versus last year.
The digital platform also significantly improved profitability in Q2 with growth in order contribution of 68% year-on-year and all contribution margin stepping up to 35% compared to 28% a year ago, and 32% in Q1 of 2020.
There were three key drivers of the higher margin. First, the growing mix of higher margin services, in particular the momentum of Farfetch Platform Solution, which comes with a lower cost of revenues and higher order contribution as a result.
Second, reduced funding of customer promotions within our marketplace. Our spend on promotion as a percentage of GMV was back at Q2 2018 levels, reversing the step-up in spending we saw this time last year.
And finally, improving first-party margins at 30% versus some 10% in Q2 2019, as we delivered a better full price mix versus last year, as well as the growth of first party original products, which have higher product margins.
These factors were partially offset by a slightly higher cost of shipping as a percentage of GMV due to the lower average order value across the marketplace. In terms of demand generation, this increased slightly year-on-year to 7.3% of platform GMV, primarily due to the SKU towards first time orders across the marketplace.
Because new customers have lower conversion rate and a higher paid mix versus repeat customers. This means the demand generation cost for our first time orders runs higher than the cost for repeat orders. All-in-all, we are in a very good place with lower absolute per customer acquisition spend and positive early repeat purchase behavior from the new customer cohort.
A final word on promotions and how they impact on platform gross margin. We deduct promotional spend from fulfillment revenue, where this means fulfillment revenue does not cover the pastor of fulfillment costs, the additional costs are included within digital platform services cost of revenue.
In Q2, the lower promotional spend resulted in fulfillment revenue growth of 99% year-on-year, well above order growth, meaning, we started to recover more fulfillment costs versus last year, which delivers a positive impact to gross margins.
Turning now to our brand platform, representing our connected wholesale business, which generated $66 million of GMV. Whilst this represents a like-for-like decline in wholesale revenue of 22% year-on-year. When we combine this with the direct-to-consumer trade on the digital platform, the New Guards business declined by just 6% overall, this is a period where other luxury fashion businesses were down 40% to 50%.
The synergies that come from owning a studio of brands that develop culturally relevant collections, and can reach a global customer base through the digital platform has delivered a strong direct-to-consumer proposition. The brand platform itself delivered $28 million of gross profit for a 42% gross margin.
Finally, our in-store segment. So a slight year-on-year decline in GMV to $4 million due to COVID-19 related store closures during the quarter. Turning to our cost base, where we have delivered strong operating leverage and efficiencies year-on-year. The operating costs of our technology platform and G&A totaled 45% of adjusted revenue compared to 49% in Q2 2019.
This reflects our continued focus on scaling our costs with the growth of the business as well as the deferring and delaying any incremental spend not being essential. Q2 depreciation and amortization was $52 million in line with Q1 2020.
And our share based payment expense was $62 million, an increase of $35 million from Q1, primarily due to new award grants, and our higher share price being reflected in the provision for employment related taxes. This increase in share based payments means our operating loss moved from $108 million in Q1 2020 to $140 million in Q2.
Turning now to our outlook for the third quarter. It is clear momentum accelerated across Q2, which has continued into the first six weeks of Q3. We have entered the quarter with 3.5 million [ph] active consumers, new customer growth remains strong. Average order value has already recovered from the levels of a year-on-year decline we saw in Q2 and is now likely to be down mid single digits in Q3. And new season product in hot demand.
We therefore expect to see Q3 year-on-year digital platform GMV growth accelerate from that, that was achieved in Q2 with growth in Q3 between 40% to 45% as compared to a year ago. We also expect our digital platform order contribution margin to remain between 32% to 35% in Q3.
Within the brand platform, with strong demand for New Guards brands, shipments of full winter product are ramping back up, and we now expect to achieve GMV of $90 million to $95 million across Q3.
Finally, we expect an adjusted EBITDA loss of $20 million to $25 million. As we continue to progress towards our target of achieving positive adjusted EBITDA for the full year 2021. COVID-19 could still impact on these results. And as always, we keep a watchful eye on the competitive position across the industry.
With that being said, the momentum of the business an amazing work from our team supporting the global Farfetch community, which we will be pleased to continue to serve with our platform proposition in the coming quarters.
I’ll now turn the call back to Jose.
Thanks, Elliot. The past few months have prompted paradigm shift in many aspects of our lives, including the way we shop. It is particularly true within luxury, which is a very resilient industry. But when that has been under penetrated relative to overall ecommerce, in part due to its heavy reliance on tourism shopping.
While luxury shoppers demand for luxury fashion is expected to remain. Luxury consumers around the globe are clearly shifting online in response to travel restrictions, as well as safety concerns in general, and Farfetch is meeting their continued demand with an unrivaled range of luxury fashion and a unique end-to-end global shopping experience.
As a result, I believe we are undergoing a major acceleration of the sustained online adoption we envisioned as a secular trend shaping the industry. With little visibility on when and to what expand international travel and pull traffic to luxury retailers will resume, brands and retailers are fast tracking their digital transformations to offset the unprecedented declines in their traditional retail, and wholesale businesses.
And farfetch’s global platform, which has been tailored built for luxury is uniquely positioned to capture this opportunity to enable and connect the curators, creators and consumers of the luxury industry.
Thank you. And we will now be delighted to take your questions.
[Operator Instructions] And your first question comes from line of Oliver Chen from Cowen. Your line is open.
Hi, thank you. Regarding the AOV recovering to down mid single. What’s been driving that improvement? And do you see AOVs manifesting as we go forward and as you introduce new clients to the platform? And Jose, I would just love your latest thoughts on physical and physical footprint and luxury goods, you own Browns, and you’re working with Chanel. What do you think happens there post crisis? Thank you.
Hey, Oliver, good speaking to you. Elliot here on the AOV question. So we seen a couple of things coming through there. The first is actually the mix effect of starting to reverse a little bit. So the new season collection that’s on the platform now from the brand e-Concessions and from our boutiques, as I said earlier, is in very, very strong demand. And clearly, as we get into the fall winter campaign comes at the higher end.
And it seems as though customers are now buying back into similar sorts of categories as they were buying last year as opposed to the last kind of couple of quarters that have been dialing back towards in more casual clothing. So that’s a positive early indication.
We’re also seeing the new customers continue to buy strong towards the top end of the AOV, which is helping that boost back up as well. So very good recovery on the product mix and the customer mix there. To a question about as we move forward, I think the AOV will still continue to be down year-on-year over the next few quarters as the new customer mix continues to hold back on expanding the AOVs. As I said earlier on, new customers tend to buy smaller baskets. So I think we’ll still be in the negative position, but not to the 18% we saw in Q2, it’s more mid single digits as we move forward now and is what we’re saying.
Oliver, sorry, I was going to answer the second part of the question. That’s okay.
Please go ahead.
Thank you. Hi, Oliver. Yes. So, on the start of the future technology, I really believe the online and offline worlds are ultimately going to converge. We’ve been pioneers in that vision four years ago for the luxury industry in particular. And around a couple of years ago, we did an exclusive partnership with Chanel, a shareholder and innovation partner.
We launched one year ago in there number one flagship store in Rue Cambon in Paris, the adoption has been absolutely exceptional, both from consumers using the Chanel, Rue Cambon app, and shops, log staff using our shop for app with all the connected experiences and connected products and devices that we have in store.
That is extremely exciting. And we are in the onset of the COVID-19 crisis. We’ve gathered our teams. And we work very, very — in a very, very intense way in terms of adapting the product and evolving the product to the COVID-19 world. And I’m very excited to — I’m looking forward to the launch of the second generation of this product. We will unveil it as we relocate to Brown in Mayfair to a new location. This also marks the marks the 50th anniversary of Brown as a company. So delighted to take this iconic boutique into the 21st Century in a revolutionary way.
And it will be a great lab and a great ongoing demonstration for new partners. The Chanel. exclusivity will come — will lapse towards the end of the year. And I think this is a huge opportunity for Farfetch as we accelerate conversations with luxury brands, but also department stores that are really prioritizing these type of solutions. And I think we have an absolutely pioneering solution that is ahead of the curve for this industry. So very excited on that front as well.
And your next question comes from a line of Louise Singlehurst from Goldman Sachs. Your line is open.
Hi, good evening, Jose, Elliott, thank you so much for the color. So far, I wonder if you can just talk to us a little bit about the promotional environment. So you’ve seen some very good expansion in the gross margin, but also where we were a year ago, and 18 months ago, we’re seeing so much competitive pressure from the likes of [Indiscernible] matches, another platforms. Can you talk a little bit about the competitive environment, what you’re seeing? Obviously, you’re getting much better dialogue, direct with the brands, onboarding more department stores, but just in terms of that competitive landscape, and where you’re kind of differentiating, obviously, we can see some very strong kind of app download data and the user numbers that’s coming through. But if you could just talk about the peers, that would be really helpful? Thank you.
Hi, Marvin. Go ahead, Jose.
Go ahead, Elliot.
I was going to say, that actually, retention of customers actually been strong. So the — sort of statistics we follow around repeat purchase on a one month, three months basis in the case that even more recent cohort customers staying with us. Really feels like there’s been a significant behavioral shift in customer mindset around shopping online and the frequency of online shopping seem to be quite sticky. Well, we are seeing or we had been seeing across Q1 and Q2 as we previously talked about is that it was different product mix. This previous customer cohorts which means that the share of the new existing customer sort of drop back the same as the new customer mix was increasing in terms of GMV
But the good news is the customers are still there and they’re still shopping. And that’s setting us for a great platform for future growth. The team in the demand generation aspect of the marketplace has done a fantastic job. Focusing the customers on at downloads, you’re seeing the download number up over 100% year-on-year. The repeat repurchase activity from the demand generation team through social media and other retargeting has proven to be very positive in terms of that retention that we’ve just been talking about. And importantly, the cost of the repeat order in terms of media spend is down year-on-year. The customer acquisition cost is down 30% year-on-year. The cost per visit is down year-on-year in terms of the data we’re using to drive a better targeting. But we’re keeping our foot on the gas in terms of demand generation spins to 7.3% of GMV as it focus on that new customer growth and retention. So we’re really setting ourselves up to benefit from the growth of online shoppers.
And your next question comes from a line of Eric Sheridan from UBS. Your line is open.
Thanks so much for taking the question. Hope all is well and safe with everyone on the Farfetch team. Maybe going back to the announcement you made a couple quarters ago in the implementation around Harrods. How should we think about that as a harbinger for potentially more deals like that, as you think over the medium to long term? And how should we think about as a contributor to growth going forward, not only in 2020, but maybe even beyond? Thanks so much.
Hi, Eric, and we’re very excited about SPS, our enterprise side of the business. And we really think we’ve proven, we’ve created the premier global platform for luxury. SPS inherits all the marketplace capabilities. And so I think Harrods, as you point out is a great case study. So from day one out of the box, they were able to service their Chinese customer, their Middle Eastern customer, their Russian customer, these are geographies that, as you know, are very important for that iconic department store.
And there’s a number of other very powerful capabilities such as, for example, the ability for department stores which is something that we’re looking forward to we’d have to launch a e-Confession within their environment, among other very exciting global omni channel capabilities. So we really see these enterprise solution delivering strong results and the existing tenants on this platform is around 20 luxury brands, three of them LVMH. As you know, they are growing very fast, faster than the Farfetch marketplace. So a number about 34%, which we think it’s demonstration — the demonstration of the strength of this enterprise offering.
And yes, absolutely new enterprise customer, we are — we’ve opened conversations earlier as you would expect with other departments stores, our brands, which I think will benefit greatly from these platform part of our business. So we — this clearly demonstrate that we are an e-commerce enabler. We’re a platform that enables not just Farfetch as a marketplace, but also department stores and brands, on websites and apps. And I think that is very, very powerful as it is a solution that is absolutely tailored for luxury and the solution that is global out of the box, which I think is a unique proposition on this front. So we think, watch the space, I think we are definitely going to continue to have good news coming from that front. Thank you.
Your next question comes from a lineup Jason Helfstein from Oppenheimer. Your line is open.
Thanks. Two questions. So can you clearly — there was a benefit, I think broadly in marketing spend in 2Q as you’re able to benefit from less expensive media costs, lower CPM, et cetera. And so maybe talk about how much that benefit or contribution margin and then kind of what you’re seeing in the third quarter as far as the media, because I do think pricing is come back off. And then secondly, it really seems that you have really helped brands get through COVID, we’re not done, but make the best of it. Just maybe talk about what you think the benefit to you from both the relationship and the business with the brands coming out of COVID? Thank you.
Jason, I’ll take the first question on the cost per serve. You’re absolutely right. We are benefiting from lower costs. I think some of that is external in terms of competitors and how aggressive they have been on search terms versus historical levels. So obviously, step back, so we’ve been able to benefit there. But also we’ve done some fantastic work internally around rationalizing and reviewing how we spend and where we put our media dollars and better ROI and the better cost of serve that comes from some of that activity particularly around retargeting social media and also the search engine marketing spin that we’ve been investing in.
So that’s allowed us to really reduce, as I said before, the cost per repeat order and the CAC. And that’s coming from the data advantage that we have as a marketplace, with substantially more visitors year-on-year with significantly higher number of customers interacting with us. And with the step up in terms of our product range, we’ve been really able to mine the data to decide where we’ll be investing our media spend and where we just don’t see the return. But what that actually mean for contribution is we reinvested that in the new customer acquisition, and clearly with its customers looking to shift online, we thought those customers out and we’ve leaned into that with additional spend. So the order contribution benefit year-on-year isn’t actually down to our demand generation spend. That was broadly 20% of our platform services revenue this year and 20% last year.
Where the benefit has come from in terms of the order contributions step up from 28% last year to 35% this year is on the promotional spend that Jose was touching on before. We, as Jose said, and our spending as a percentage of GMV at 2018 levels. So we reverse this step up with all last year. Actually, our cash promo spend is down 26% year-on-year so we’re spending less on promo than this time last year even with the step up in GMV growth. And that’s because we had no ex events of markdowns. We had no ex events of full price. We had half as many free shipping days. And as a result the GMV with a promotion actually half year on year. So with a full price mix and really pulling back on promotions to support the industry is coming through as planned. And what that means is, we’d been able to step the gross margin, both of the 1p business but also the 3p business, we all have that promotional spend from us has been pulled back. And that’s why you’ve seen the gross margins of the platform moved from 48% last year to 55%. And then within that, you can see we’ve included for the first time as split of that between 1P and 3p. The 1p business has moved from sub 10% gross margin to 30% gross margin, a combination of better full price mix and mix promotions on external brands and of course the stronger product margin that come through from the first party original business out of new guys group. So really sort of all the plans to expand the gross margin. And as we talked about before, the higher first party original improved margin on one pay, reducing reliance on promotions and of course saving on demand generation which we have, of course reinvested this time and allow us to reinvest or helping drive the order contribution up and also that’s given us the confident to be at 32% to 35% contribution in Q3. I won’t go into demand generation spend and what we’re seeing in terms of media spend for Q3 just yet. We still got six weeks of the courses ago and I think all things can change. So I’ll update you on that when we next speech.
And yes, Jason on your second part of the question regarding brand and helping brands, navigate COVID and I think what we going to think is a real paradigm shift. And I think it’s paradigm shift is happening from the demand side and is happening from the supply side as well. I think clearly, luxury consumers are moving to online increasingly. And there’s also what is very specific to the luxury industry, a huge repatriation of luxury spend. If you take China for example, in 2019, Bain estimates the Chinese bought $70 billion while traveling, so they are 35% of the industry and a significant percentage of that was done while traveling. So — and now they’re not traveling, which opens an incredible opportunity to service them online. And travel brands have reported strong demand in China. We believe that’s a market that was already an incredible opportunity.
We will have an additional opportunity now.
That also applies to other countries around the world, the Middle East, Latin America, we’ve seen very strong growth of both marketplace in those regions and I think what’s happening is that that paradigm shift in terms of the consumer means that there’s a paradigm shift in terms of the brands as well as department stores as they absolutely have to fast track their online and their e-commerce strategy. And here is where Farfetch comes in. I think we are clearly the platform of choice for this global multi hundred million industry. We are very focused in being a great partner for boutiques, brands and department stores throughout this crisis and for the future. And clearly, we can assist them globally, not just in their domestic markets, but crucially in the largest luxury good markets in the world where we have a real competitive advantage. And you see that in the numbers. We are witnessing an absolute acceleration throughout Q2 and into Q3. And as a result of this paradigm shift and the long standing sustained dynamics of the industry.
And your last question comes from a line of Doug Anmuth from JPMorgan. Your line is open.
Thanks for taking the question. Elliot, I knew you talked about acceleration through 2Q and then into the third quarter shopping, you could give a little bit more detail around this momentum, kind of what you’re seeing July into August and a little bit more on what gives you the confidence on growth accelerating into that 40% to 45% range in 3Q? Thanks.
Hey, Doug. Yes, we certainly saw quite rapid acceleration towards the back of the quarter, even over the last ten days try to stick up again and that has continued through into Q3 and quite pleasing, we’ve seen it actually come out of the U.S. market in terms of demand. So we’ve talked in the past that China sort of bounced back first, the back of Q1 and Q1, within in Q2 at the start or UK and Europe start to pick up. They’ve both been particularly strong throughout Q2, as has the Middle East, and Latin America. But the U.S. really was quite sluggish until quite recently, where we’ve seen the spike, swipe jumped back up.
That therefore added to where we’re seeing the other major markets like China growing ahead of the platform, UK and Europe and Russia, a growing heat of the platform and now the U.S. starting to boost up as well, means, we’re more confident about demand over the quarter. We’re also seeing that the — as you can before the customer retention is there, the customer interaction is strong. We’re seeing new customers continue to really drive trade. So the level of trade, we talked about across Q3 in terms of share of GMV continues into the first six weeks of Q3 with in 2017 levels of GMV from new customers. And the supply of product that’s coming on to the marketplace, continues to be strong, although slightly delayed a few weeks, as we’ve been talking about in terms of uploads versus prior years, but as it’s been coming on stream, in very, very strong quantities, very, very strong range.
And then lastly, across FPS and the clients on our platform outside the marketplace, we’re seeing continued strong growth across the vast majority of those clients in terms of adoption of online by their customers as well. So this is really driving sustained growth in a clearly six weeks in to be able to step up to 40 to 45 shows that we have seen strong growth across July ahead of where the platform was for Q2. And we’ve 500,000 fabulous new customers across Q2 that we are showing benefit of staying with platform enrolling them straight to access. We’ve now got 2 million customers in Access and we are looking up those customers to push them up from bronze to silver to gold through frequency of shop. So we’re really seeing the data tell us that customers are here to stay. They’re telling us through research that they’re shopping online, because of the pandemic. They intend to shop more online because of the pandemic. And I’m really starting to I believe developing growing behavior around buying luxury online which means that sustain for the future. That’s why I’m confident that we can be in 40% plus 40% to 45% for Q3.
And there are no further questions. I’ll turn it back to our presenters for some closing remark.
Terrific. Thank you, Rob. Well, thank you all for joining us. We look forward to speaking to you next quarter to discuss our Q3 results. Have a good night.
Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.