Outside the Box: ESG gives a tailwind to clothing ‘re-commerce’ companies

Read: ThredUp, RealReal narrow third-quarter losses

The re-commerce providers are part of the trend toward a more circular economy, driven to a large degree by millennial and generation Z consumers. They connect sellers of second-hand clothes and accessories with buyers, creating social marketplaces that give new life to old items and keep them out of the landfill.

The level of “yes” responses among millennials and gen Z participants when asked this year “if they purchased apparel, footwear or accessories secondhand using a resale marketplace in the last 30 days” increased 33% year over year from the 2020 Cowen survey. 

As eCommerce gains in volume, e-tailers and retailers alike are awash in consumer returns, which has set the stage for new players to solve what has become a rapidly expanding phenomenon.

The U.S. online resale market is expected to grow by about 25% a year to reach $68 billion by 2028 as the newer players take share from mall retailers and thrift stores.

ESG angle

This sustainability factor is also a key part of these firms’ pitches to investors as interest surges in ESG investments that meet certain criteria, such as low carbon emissions and social impact. A growing number of funds are more heavily weighting their holdings toward ESG investments or are entirely dedicated to them.

The RealReal
REAL,
+14.72%,
Poshmark
POSH,
+4.59%
and ThredUp
TDUP,

all devoted part of their pre-IPO S-1 statements to stressing their environmental and social mission, something that will remain a key point of attraction for investors. All three IPOs — the latest being Poshmark and ThredUp this year — attracted strong institutional demand, trading up significantly on the first day in an indication of their appeal.

The race is now on for these players and others like Tradesy, ReBag, Fashionphile and Trove to organically grow their marketplaces as quickly and smartly as possible.

Scaling for growth

Scale is key to successfully maximize the network effect and supply chain synergies they need. The winners will be those who are quick to create the biggest, highest quality marketplaces, something that will require big spending on technology and marketing in the coming months. Only then are we likely to see the first wave of consolidation in the sector.

As they build their marketplaces, re-sellers need to put as much effort into quality as quantity. It will be of little use, for example, to attract a lot of customers who use the platform once or twice but who then rarely, if ever, come back. That type of customer doesn’t justify the marketing costs of acquiring them and won’t help create the strong community of buyers and sellers that is crucial for success.

The challenge for fashion re-sellers is to draw in high-quality, repeat shoppers and sellers through the smart use of marketing and by developing attractive online experiences that minimize friction.

Poshmark, for example, has developed “Posh Parties,” where buyers and sellers interact in real-time events, giving sellers an opportunity to display their “closets” in a more social setting. This type of interactive model is designed to appeal to the younger, tech-savvy generation but also holds broader appeal, especially at a time when COVID has deprived people of social interactions.

Technology challenge

Getting the technology right is going to be the other key determinant of success. Re-commerce players are broadly divided into two types, with each requiring somewhat different approaches to technology.

Peer-to-peer platforms such as Poshmark and Tradesy only act as conduits for the transaction between buyers and sellers, never actually touching the goods themselves. For these players, the technology challenge is to reduce transaction friction and speed inventory turnover as much as possible by smoothing the listing process. This can be done through features such as image recognition and smart pricing suggestions based on past sales data.

Other players, including The RealReal and ThredUp, act as consignors of the second-hand items and sell them on to customers. This model comes with additional technology challenges, demanding a laser-focus on efficiency to succeed.

Although there are already several major brands fighting for the number-one spot, they are well protected against new entrants by relatively high barriers to entry in terms of logistics and technology.

One major player, Etsy
ETSY,
-1.07%,
an American e-commerce company, acquired U.K.-based Depop, an operator of a mobile marketplace for new fashion or used, mint-condition apparel, in June of this year for $1.6 billion.

Fortunately, 500-pound gorilla Amazon
AMZN,
+2.78%
doesn’t appear to have the second-hand clothing market in its sights as it focuses on other priority areas like Hollywood, groceries and health care. 

Patrick Crocker is managing director at Cowen and Co.