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July 16, 2020

Business Model Innovation – Resale Fashion

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One of the new niches in the fashion world is the ‘Resale’ (ie. consignment) category. Part thrift, part sustainability, this new ‘niche’ has evolved into a multi-billion dollar market and has the potential to transform the retail model.

What is Resale Fashion?

Historically referred to as ‘thrift stores,’ Resale is a new market category in the fashion world being pioneered by companies like Thred Up, The RealReal, Poshmark, and a slew of other upstarts. Major eTailers like eBay and Etsy are also in the mix, while Farfetch has its own Second Life platform for second-hand goods. Even major fashion brands are selling their secondhand goods on ‘Resale-as-a-Service’ (RaaS) platforms. Simply put, Resale is the retail of secondhand fashion goods.

“When I started thredUP in 2009, mainstream retailers weren’t thinking about secondhand,” thredUP founder and CEO James Reinhart tells me. “Now we’re hearing from brands big and small who want to get involved.”

Morning Brew

Every major city and town probably has a good local vintage/consignment store, or two, but this new category has a new business model that pairs well with the eCommerce shift in the midst of the retail apocalypse. Furthermore, few will shed tears for the Fast Fashion corporations that have built their brands on cheap labor; thus there is a renewed demand for goods that are more sustainable in both a social and environmental context. Large retailers who have been hammered by the COVID19 pandemic and seen stores shuttered worldwide are being forced to rethink their entire business model, and that’s why Resale is now so relevant to the retail model.

2020 Resale Report

Thus we are seeing the emergence of Resale as possibly the new, new retail. New retail was supposed to be this hyper-tech AR (Augmented Reality) version of the world, where physical and digital channels became intertwined. It seems that COVID19 and macro trends are creating big enough headwinds that new retail (as it were) will not be enough to save major retail brands, especially those with a large commercial real-estate footprint. Instead, we need new, new retail (or just retail) models that shift the focus back to lean operational structures and innovative distribution networks to ensure that major players can mitigate the risks associated with the wholesale model. Resale is, in effect, a major business model innovation (BMi) for the retail sector.

No surprise: with Neiman Marcus and J.C. Penney in bankruptcy and other multi-brand retailers struggling, wholesale-dependent brands are ice-cold with investors.

BoF

How Does It Work?

There are a few different audiences and segments within the Resale market that different brands are trying to target. Of the main three we listed above, each has a completely different strategy:

>Poshmark (not yet public, planning IPO) has created a mobile app that creates a ‘decentralized’ network of Poshers (ie. social shopping) who buy and sell secondhand goods to one another. When a user uploads and sells a good, they ship the good to the other user, while Poshmark takes about 20%. The only exception is goods priced > $500 USD that are shipped to Poshmark HQ for authentication, and are thus charged a higher fee

BoF

>The RealReal (publicly-traded $REAL) is a luxury consignment Resaler that authenticates all of its goods (naturally not without controversy). That means that the seller ships to REAL and they ship to the buyer, with an authentication process in between. They have about 19% of the Resale market share, have more than 500K buyers (~80% repeat), and have a Take Rate > 35%. Thus it is more of an online retail brand, as opposed to a social-selling network like Poshmark.

Pitchbook

>ThredUP (not yet public, ~$675 post-money valuation in August 2019) started out more like Poshmark, but has now expanded into the RaaS (Resale-as-a-Service) for major fashion retail brands. In aggregate, what makes ThredUp different is that they are a more omnichannel Resaler, using their ‘Clean Out Kit’ to enable individuals at home, and in stores, to send their clothes in the mail for ThredUp themselves to photograph, price, index, and sell. The mechanics of the RaaS model are more complex to explain (involving store credits) but the core business model is to take >20% of the sale price.

ThredUP CleanOut KIT

That means a customer in The Gap physical store can ship secondhand clothes (in a Clean Out Kit) to ThredUp, while someone at home could theoretically buy secondhand Gap clothes via ThredUp. The secondhand buyer could then resell those clothes back to ThredUp using the Clean Out Kit, thus creating the ‘circular economy’ and enabling full-circle upcycling.

Thredup has already upcycled 100 million items

Refinery29

ThredUP X GAP

You can see that the models differ greatly depending on:

>the price of the good (ie. needs to be authenticated or not)

>whether it is P2P (Peer to Peer) or not

>whether or not brands participate in the platform

If you look at Farfetch’s SecondLife platform, it hybridizes the above models and enables users to sell their goods (handbags only) in order to receive credits to spend on Farfetch.

FTCH Second Life

This model taps into a very unique psychology in the luxury side of the market, where an individual would sell their current handbag (for example) on Farfetch for the ability to, in effect, buy a new handbag at a discounted rate. Farfetch does all the legwork and authentication but also creates a pseudo-currency that incentivizes users to buy something on the platform. Since Farfetch is one of the dominant eCommerce platforms for high-end clothing and accessories, the SecondLife program theoretically enables them to enter the Resale market without any changes to their core brand; this is likely what other major retailers hope to achieve in the market as well.

There are many other players, new entrants, and moving pieces in this market, so ‘How Does it Work‘ will probably evolve significantly in the years ahead but for now those are the major models in the Resale market.

Customer Acquisition

Part of the entire shift in fashion around customer acquisition is away from Instagram, etc. back to more organic, lower-cost channels.

Investors say they are also avoiding companies that need to pour millions of dollars into Instagram ads to grow. Convincing customers to come back again and again is preferable.

BOF

What fashion brands at all levels of retail – whether online or offline – want is to reduce their CAC (Customer Acquisition Cost), increase brand loyalty, and ultimately preserve their margins. Given the dynamics of Resale and the über fast growth expected in the industry over the next 5 years, the key to customer acquisition will be to prevent CAC from eroding into the margins of Gross Merchandise Value (GMV). Historically, CAC goes up as a market matures due to more competition.

How much is the resale market projected to grow over the next half-decade? 21x faster than the rest of retail to reach $51 billion in the next five years

MORNING BREW

As we saw in The RealReal’s numbers above, they have a very high Take Rate (~36%), strong repeat buying, and good overall growth, but they are not yet profitable. This is indicative of the fact that their underlying ops and tech expenses eat into their margins at today’s levels. With 19% market share and a luxury-only catalog of goods, it does seem to be well-capitalized to thrive in Resale. But there are problems related to Returns (~29% of GMV in 2018), continued investment into Tech, and an ongoing battle to keep LTV/CAC to above 3.

In 2015, the company broke even on each customer it acquired after six months, and started profiting from there, with LTV equaling 3.5x CAC three years later. However, in subsequent years, while the LTV:CAC ratio has increased after the first three months, it has fallen for the same cohort over the course of six months, 12 months and 24 months, meaning that The RealReal’s earliest users have the highest LTV, while its more recent users are not spending as much.

Loose Threads

Comparing the Take Rates of a model is not enough. As you can see, REAL makes a lot on the top line (revenue as a % of GMV) but has its margins eaten by rising technology + opex costs, while needing to continue to attract buyers with a good LTV. Other platforms have established network effects and can bundle Resale into their core business, thus avoiding the constant margin pressure.

Forbes

For the mainstream brands (ie. Anthropologie, etc.) using ThredUp’s RaaS platform to sell their brand of secondhand goods, it is likely a strategy to create a new channel for acquiring customers over the long-term. Company’s who manufacture and sell their own goods would prefer customers to buy new merchandise. The margins for an established brand to sell secondhand, mid-market clothes are likely not great, but the Resale channel may also create a new way for them to brand their merchandise in line with the emergent theme around sustainability, and restructure the wholesale model. The net effect of the Resale channel may be to increase LTV by creating longer-term, more loyal buyers to the core brand.

ThredUP

Luxury goods naturally preserve the highest resale value, while GenZ is the likeliest cohort to subscribe to the values around sustainability, upcycling, etc.

2020 Resale Report
2020 Resale Report

The only paradox among the trend towards luxury goods + younger customers is the possible decrease in purchasing power as a result of the recessionary trend from COVID19. Lower priced, non-premium goods may drive demand in the short-term, but some platforms and retailers may place bets on “the recovery” instead. No matter what the strategy, customer acquisition will be paramount to the success for platforms and retailers alike over the mid-term.

Competition

Competition will be fierce and come from all sides.

Prominent Fashion 2.0 platforms like RentTheRunway are a substitute in this market, enabling members who subscribe to ‘rent’ clothes and swap them back. They hit a $1 Billion valuation in 2019 (probably lower now) and may see their core model under pressure – could they make an adjacent move into Resale? Yes.

Since the market is red hot, VC money has moved behind direct new entrants like Vestiare Collective from Paris (raised €59M in April) and Rebag from NYC (raised $15M in May), among others in the space. This at a time where VC funding has shrunk dramatically across the majority of other sectors.

People now also value circular business models as it becomes more affordable to refresh your wardrobe, especially during an economic crisis, and it is better for the environment.

TechCrunch

The VC-funded DTC (Direct to Consumer) Boom has fizzled out dramatically, and now those that are surviving and still capitalized will need to find innovative ways to increase their margins/LTV and find new distribution channels, both online and offline. Whether incumbent brands partner/acquire these brands and use them as a proxy, or they simply go after the market on their own, the one thing that they generally have going for them is their ability to market to the younger generations (Gen Z + Millennials).

And then there are the major fashion brands themselves (both retail storefront and wholesale brands) who are starting to dip their toes in the market. Despite the Retail Apocalypse and bankruptcies of major brands already, these companies all have the advantage of being able to raise capital and reinvent their model, even if it does occur through bankruptcy.

A research report from UBS predicts that 100,000 brick-and-mortar U.S. retail stores will close by 2025, in a trend that started before the pandemic and has accelerated amid coronavirus-related shutdowns.

Axios

The big money (private equity, etc) knows that the winners in this category over the next decade will be worth multi-billions of dollars, and there will probably be many. If, as projected, Resale grows to worth more than Fast Fashion and Traditional Thrift by 2029 (~$44B), then you have to wonder what ripple effects that will have on the retail categories within fashion, which are worth A LOT more money.

2020 Resale Report

There are too many unknowns around Resale right now to predict the outcomes, but what we can see is how this BMi (Business Model Innovation) will likely become part of the new, new retail model, and possibly integral to the survival of major brands in the years ahead. It is a fast-growing, multi-dimensional market that benefits consumers and the environment, so let’s see where it takes us over the next 5 – 10 years.

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