Long Cettire

Summary

TAM: The market is sufficiently large, with Cettire positioned within a high-margin, highly fragmented wholesale market for small brands in the personal luxury sector, which makes up 70% of this segment’s market share. This channel is crucial for small brands, and Cettire’s current revenue is only 0.5% of this $100 bn market.

Competitiveness: The business model of parallel market e-commerce platforms has proven viable. In China, a similar platform with revenues exceeding Cettire’s has already expanded globally. Also, Cettire’s business model is a rare one that combines both rapid growth and economies of scale. This business model is highly likely to drive significant consolidation in the luxury e-commerce industry in the future (Matthew Effect).

Valuation: Dewu’s valuation has reached USD 10 billion, while Cettire, generating about 25% of Dewu’s revenue, is valued at only AUD 500 million. Based on the latest financials, Cettire’s EV/FCF ratio is approximately 10x—a level that does not seem to account for its growth potential, misaligning with the TAM’s size and Cettire’s competitiveness.

Why Undervalued: Like Pinduoduo (PDD), which faced initial skepticism, Cettire’s target market and significant room for growth are misunderstood by the market. Dewu’s revenue exceeds USD 2 billion, significantly outpacing Cettire. Yet, despite similarities in business models, Dewu’s valuation and operations have not been penalized for involvement in parallel markets.

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Bear Views

1. Cettire is just another dropshipping model with limited competitive advantages. Farfetch has a similar business model and was recently acquired by Coupang for $500 million. This raises questions about the robustness of Cettire’s business model, as well as the TAM for online retailers.
2. Cettire never disclose who their suppliers are. Brands won’t tolerate parallel exports/grey market.

My Views

1. It is an online platform that connects numerous wholesale distributors and boutiques with customers, while also controlling product pricing. These two factors are key drivers of the Matthew Effect, which will lead to increased industry consolidation. The issue lies with Farfetch’s founder, not the business model. The Total Addressable Market (TAM) is vast and highly fragmented.
2. Cettire sources from wholesalers and boutiques, sharing similar suppliers with Farfetch and DeWu. Brands have neither the intention nor the capacity to regulate parallel exports/the grey market; in fact, their stance may even be supportive. Only the top 10 brands (account for 30% of the market share) strictly control their distributors. The worst-case scenario is becoming another Farfetch, losing the low-price competitive edge by working directly with brands. However, the main profit would come from small brands with a 70% market share, so Cettire's profitability wouldn't be negatively impacted.

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Cettire is not just another dropshipping model

Cettire operates in the wholesale market for small brands, which accounts for 70% of the personal luxury market. This market is not only vast and highly fragmented but also offers ample margins, serving as a crucial channel for small brands. The business model of parallel market e-commerce platforms is viable. China already has such a platform with higher revenues than Cettire’s, which has also expanded globally.

Cettire’s business model is a rare one that combines both rapid growth and economies of scale. This new model is highly likely to drive significant consolidation in the luxury e-commerce industry in the future (Matthew Effect)

Current E-commerce platforms can be divided into these categories:

Competitive Advantage: Cettire operates as a no-inventory platform-based online store. Compared to inventory-based models (such as Net-a-Porter and SSENSE), this capital-light model enables faster early-stage growth, as it avoids inventory management and product selection. Additionally, Cettire controls the prices of products sold on its platform; thus, when GMV increases, unit costs decrease, as no CapEx is needed for storage, nor working capital for inventory In contrast, inventory-based models require spending on CapEx and working capital as GMV grows.Since Cettire relies on wholesale distributors and can price products below retail, it gains stronger pricing power with suppliers as GMV grows. This creates a positive feedback loop or ‘flywheel’ effect—greater GMV increases pricing power, which in turn drives further GMV growth. As scale grows, cost advantages strengthen, making Cettire’s competitive edge particularly robust.

• ?Case Study: Platforms like Alibaba, operating as no-inventory e-commerce models, have the advantage of rapid initial growth but eventually lack economies of scale. In contrast, platforms like JD, which hold inventory, benefit from economies of scale—GMV growth enhances pricing power with upstream suppliers. However, JD’s initial GMV growth rate lagged behind Taobao's. As shown below, BABA reached 3 trillion CNY in GMV in 5 years, compared to JD’s 8. After reaching these ceilings, JD has greater growth potential. BABA and JD’s YoY GMV growth over the last three years was 8%, -6%, 2%; and 27%, 6%, 4%, respectively.

Farfetch’s founder is the problem, not its business model

Farfetch never generate positive free cash flow, and founder’s capital management is the ultimate reason why it failed: (a) made a series of poor acquisitions and strategies; (b) a lack of focus on core business. With its current business model, Cettire is a capital-light business (requiring no CapEx and with negative working capital), scalable, and has already generated positive FCF. With a major competitor exiting the market, Cettire is likely to capture Farfetch’s market share and grow even larger.

Cettire’s TAM is the wholesale market for the 70% market share of the long-tail brands. The 1st-tier luxury brands (e.g. LV, Chanel, Hermes etc.) represent about 20% of the global market and sell almost 0 through wholesale. The 2nd tier brands (GUCCI, Dior etc.) have 10% of the global market and sell nearly 20% of their products through wholesale. Then there is a long tail of 2,000 or so brands that account for some 70% of total global luxury soft-goods sales, and nearly 70% of their revenues are generated through wholesale channels.

Global personal luxury wholesale market, estimated to be around $100 bn (data shown below), and Cettire today accounts for about 0.5% of the total.

1. Cat Rock Capital: $100 billion in annual sales
2. Joor[1]: $130 bn (wholesale makes up half of sales for 74% of fashion brands = 350 bn*74%*50%)

The parallel market estimated to be 30%-50% of the wholesale market

1. Re-Hub[2]: $57 billion a year
2. Bernstein's Luca Solca[3]: $30 billion (The grey market is estimated to be worth up to 10 percent of the $309.5 billion personal luxury goods market)

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Supply Chain Vulnerability

Cettire sources from wholesalers and boutiques, sharing similar suppliers with Farfetch and DeWu

1. Cat Rock’s Alex Captai, the second-largest shareholder, claimed in an interview that Cettire sources its products primarily from wholesale suppliers based in Italy or France. [4] Given that the firm is a cornerstone investor in the IPO, his statements have a certain degree of credibility.
2. DeWu employee’s CV on LiePin.com (China's version of Seek) shows that, DeWu, which sold over 14% of Louis Vuitton’s total estimated sales in China of $2.5 billion for the first half of 2024 [5], views Cettire as a competitor. This suggests that DeWu and Cettire likely operate within the same industry and may share similar upstream suppliers, such as wholesale distributors.
3. A customer posted on Xiaohongshu APP stating that she found a Farfetch tag in her Cettire package. This may suggest that Farfetch and Cettire share the same upstream suppliers, and that Cettire operates legally without legal risks which short sellers are concerned about.

Brands have neither the intention nor the capacity to regulate parallel exports/the grey market; in fact, their stance may even be supportive, because:

Small brands (make up 70% market share) rely heavily on wholesale. For example, Bain and Re-Hub conducted a research shows that sales on daigo platforms (parallel market) can represent 60%–70% or even more of their total mainland China sales [6]

Small luxury brands often avoid disclosing their revenue segments for DTC and wholesale channels. To maintain a degree of transparency, some companies may release only vague data. The table below shows that over 70% of Capri’s stores/doors are wholesale.

The reason brands are not willing and able to control the parallel markets is: to sell excess inventory, to enter broader markets, and to boost sales.

1. To sell excess inventory. Because of the fast-changing fashion trends/seasonality inherent to the industry, oversupply of luxury goods is almost inevitable. Brands unsold stock as they shift into its new designer's collection, they may sell that product in bulk to alternative channels like outlets and it can more easily end up on the grey market.[7]
2. To enter broader markets. Distributors are often more capable of selling more goods than the brands themselves due to factors like tax differences and fluctuating foreign exchange rates, which can significantly affect price adjustments and be costly for smaller players. The case of Rolex’s acquisition of its distributor Bucherer may suggest that, for smaller brands in the long tail, distributors who are closer to the consumer could actually have more bargaining power.
3. To boost sales. With known Chinese grey market partners even coming to view product in their Paris and Milan showrooms, usually the preserve of an exclusive coterie of buyers and editors. One senior fashion insider close to several of the biggest global luxury houses described it as a “tap” that brands open or close, depending on their sales targets[8] Vetements’co-founder Guram Gvasalia stated in Financial Times that: “Brands are perfectly aware of the parallel market, and the stores involved in it, but are closing their eyes in order to further report growing sales numbers.” (illustrated by the CV shown below: employees are hired specially for wholesale distributing to Asia markets) Source: LiePin.com

Geo-pricing. The formation of parallel (gray) markets is actually caused by the brands themselves, due to a combination of factors[9]: (1) brands in Italy and France generally offer the lowest prices; and (2) Italy has the highest number of wholesale distributors.

Resale is permittable outside EU. Trademark rights are typically “exhausted”once the product has been sold. That means resellers are within their rights to sell them again. EU trademark law however, is more aligned to luxury brands rights.[10]

1. Example 1: Italist isn’t an o?cial Prada supplier, and it isn’t authorised to sell the brand’s goods. After Prada sending a cease-and-desist letter to the website, it is still up and running and selling Prada products. This proves that brands are not able to fully control parallel exports.
2. Example 2: DeWu’s sales of Louis Vuitton products account for 14% of Louis Vuitton's total sales in China during the same period. Yet, Louis Vuitton does not seem to take any significant action against this.

Only the top 10 brands (account for 30% of the market share) strictly control their distributors.

The wholesale channel share for the top 10 brands is not only low, but the price difference between wholesale and retail prices is also small, leaving insufficient profit margins. In contrast, smaller luxury brands with a 70% market share tend to have a wholesale channel share greater than 70%, providing enough profit margin. Therefore, Cettire’s profit primarily comes from these smaller brands that represent 70% of the brand shares. The wholesale price is 30-50% of the retail price, providing a significant profit margin

The worst-case scenario would be it becoming another Farfetch, because:

Even if the competitive advantage of low prices disappears in the future, the remaining advantage would be the large variety of SKUs. The users Cettire accumulated during the low-price phase would continue to stay on the platform.

1. Some brands, such as Zegna and Staff International, have already begun direct collaborations with Cettire.
2. When PDD flooded the platform with low-priced counterfeit goods, the news about these fake goods successfully attracted a large number of users. After the product review process, these users continued to stay on the platform.

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Valuation

DeWu’s Valuation

DeWu is now worth 10 billion USD [11], Cettire can achieve the same level of revenue, it is worth noting that Dewu has just started on overseas platforms, while Cettire has already been operating globally for seven years.

Relative Valuation

Net cash 36mn, EV 500mn, FCF=OCF+ICF=48mn, EV/FCF = 10x?

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[1] Joor, the digital wholesale platform, July 31, 2023

[2] Reuters, China's booming grey markets add woes to luxury brands, October 21, 2024

[3] BOF, Brands Beware: The Digital Grey Market Is Growing, 30 January 2020

[4] Value Investor Insight, April 30 2024

[5] Bloomberg, August 2, 2024

[6] Bain & Re-Hub, 2023 China Luxury Goods Market: A Year of Recovery and Transition, March 08, 2024

[7] BOF, Fashion’s Dirty Secret: Millions in Grey Market Sales, 16 August 2018

[8] BOF, Fashion’s Dirty Secret: Millions in Grey Market Sales, 16 August 2018

[9] Mario Ortelli, managing partner of luxury advisors Ortelli & Co

[10] BOF, Brands Beware: The Digital Grey Market Is Growing, 30 January 2020

[11] Financial times, ‘800lb gorilla’: luxury brands battle China’s hit grey-market app, October 15 2024