👕thredUP: Resale Goes Mainstream👕

For years, PETITION has been covering the emergence of resale as a new and growing retail category (see here, here, here and here). If VCs can write self-aggrandizing social media posts whenever one of their investments goes public, surely we can take a small victory lap too. On March 3, 2021, thredUP Inc. (“thredUP”) filed its S-1 ahead of an IPO. The S-1 allowed us to dig deep into a major player in the resale market.

thredUP claims to be one of the world’s largest online resale platforms for second-hand women’s and kid’s apparel, shoes and accessories. Founded in 2009, the business currently boasts 428,000 Active Sellers and 1.24 million Active Buyers who come to the platform to find items at an up to 90% discount to their estimated retail price. thredUP claims its platform is loved by both parties; buyers love shopping value, premium and luxury brands all in one place, while sellers love the convenience of unlocking value for either themselves or the charity of their choice. thredUP sees a huge opportunity in the resale market — according to the GlobalData Market Survey, the resale market is expected to grow from $7b in ‘19 to $36b by ‘24, representing a compound annual growth rate of 39%.

How Does thredUP’s Business Work?

thredUP’s entire end-to-end chain works as follows:

A seller signs up for thredUP and orders a Clean Out Kit. She fills thredUP’s ‘Clean Out Kit’ with items from her closet that no longer spark joy:

Sellers on thredUP’s platform benefit from an extremely low touch platform: thredUP essentially does all the work. The seller’s only decision to make prior to shipping their clothing is whether they want to sell their clothing for cash, store credit, or donate the proceeds to charity. Once that decision is made, the seller fills the Clean Out Kit bag and leaves it on their doorstep for a mail carrier pick up, or drops it off at a retail or logistics partner location for shipping, free of charge. Once the items are shipped, the seller’s work is finished. thredUP’s proprietary platform manages item selection and pricing, merchandising, fulfillment, payments and customer service. thredUP uses an internal software algorithm to “predict the demand for an item and determine a listing price for it, along with setting the seller payout ratio, with the aim of optimizing sell-through, gross profit dollars and…unit economics.” Seller payout ranges from 3% to 15% for items listed at $5.00 to $19.99, and up to 80% for items listed at $200 and above. For the year ended 12/31/20, that resulted in an average seller payout of 19% of the item sale price with an average seller payout per bag of $51.70. thredUP is clearly working with small dollars, but on significant volume.

Harvard Business School covered thredUP’s origins as “a peer-to-peer online clothes sharing site for adults.” In the words of co-founder and CEO James Reinhart, “It was a great story. And a bad business…Customer adoption and use of the product wasn’t nearly what we had hoped.” In 2009, acceptance of secondhand clothing was not mainstream. In 2012, thredUP pivoted to the children’s market. Per Mr. Reinhart, “[thredUP] realized there was a huge opportunity in kids because there’s the forced obsolescence of kids’ clothing.” thredUP was able to scale the business quickly from less than 20,000 adults to more than 300,000 parents, adding at a rate of 500 to 1,000 per day. thredUP discloses in its S-1 that the company shifted again in mid-2019, de-prioritizing its product sales in favor of consignment sales. As thredUP’s S-1 indicates, consignment may be a vastly superior retail business model. Per the S-1:

“We believe that operating primarily on consignment also gives us the ability to drive stronger future margins than traditional inventory-taking business models because we incur minimal inventory risk and benefit from favorable working capital dynamics. Our buyers pay us upfront when they purchase an item. For items held on consignment, after the end of the 14-day return window for buyers, we credit our sellers’ accounts with their seller payout. Our sellers then take an average of more than 60 days to use their funds.”

In other words, thredUP presumably derives a kind of “float” benefit as well, generating interest income off of that 60-day average. In addition to those positives, thredUP preserves a degree leverage over its sellers. Once a customer ships its items to thredUP, thredUP can decide which goods will ultimately be passed through to the marketplace, and at what price they will be listed at, therefore locking in platform product quality and margin.

thredUP - A Contrarian Strategy

In a letter to potential shareholders, Mr. Reinhart outlines the criticism thredUP faced from its earliest days:

“Since the earliest days of thredUP, we have been told that our strategy was contrarian. That our commitment to cracking the hardest infrastructure, supply chain and data challenges in the service of a better customer experience was risky or could lead to failure. “Touching things” is hard. “Low price points” are hard. “Single SKUs” is just plain crazy. Yes...We are doing the hard things that meaningfully expand this opportunity and enhance our leadership position. I have been willing to be misunderstood and even underestimated in taking this approach, driven by my belief that businesses that are harder to build in the short-term can have extraordinary long-term impact.”

In its S-1, thredUP outlines various proprietary technologies and processes it utilizes to execute its “contrarian” strategy. thredUP operations are “purpose-built for “single SKU” logistics, meaning that every item processed is unique, came from or belongs to an individual seller, and is individually tracked….” As there are no barcodes on clothing, moving all these unique SKUs can only be accomplished through technology. thredUP’s technological aids cover i) visual recognition of items, ii) supply acceptance and itemization, iii) pricing and merchandising, iv) photography, and v) storage and fulfillment.

Photography is one of the largest and most expensive pain points when prepping an item for online sale. thredUP claims it “utilizes machine learning and artificial intelligence” and “software that automatically selects the optimum photo to drive buyer engagement…[a] specialized photo selection capability” which enables thredUP to produce hundreds of thousands of high-quality photos a day without a professional photographer.

As Mr. Reinhart alludes to in his letter, one key to managing thredUP’s volume is reliable distribution. thredUP has leased five different distribution centers in Arizona, Georgia, and Pennsylvania, with total capacity of 5.5 million items (the company has plans to expand that to 6.5 million by the end of 2021). On current capacity, thredUP has the ability to process more than 100,000 unique SKUs per day. thredUP’s engineering team has developed and implemented automation technology, which the company believes results in reduced labor and fixed costs while increasing storage density and throughput capacity. thredUP also claims their software matches buyers to the closest distribution center, while personalizes the assortment potential buyers they see on the marketplace to items that are physically closest to them. This geographical personalization enables buyers to find items that are lower priced (the closer the item, the lower the price) and more likely to arrive quickly. Underlying all this is thredUP’s trove of data. thredUP’s business captures large volumes of data from touch points throughout the resale process, including transactional and pricing data from brands and categories, as well as behavioral data from buyers and sellers, which is fed directly into thredUP’s pricing algorithm.

thredUP’s website is a disruptive model which dramatically improves the resale shopping experience for both buyers and sellers. thredUP believes resale is on pace to overtake the traditional thrift and donation segment by 2024. For buyers, thredUP offers depth of selection and ease of browsing. The company claims it lists an average of more than 280,000 new secondhand items each week, with 35,000 brands across 100 categories and across price points. There’s no question thredUP offers a dramatically improved shopping experience versus traditional brick & mortar thrift stores. In comparison to traditional thrift stores where buyers sift through reams of clothing, thredUP undergoes a “rigorous twelve-point quality inspection” which they believe prevents low-quality items from being listed. In the S-1, the company discloses that only 59% of the items it received from sellers were listed on the marketplace after curation and processing. thredUP offers evidence this quality inspection produces results: of thredUP’s 12% return rate for total items sold, returns due to poor item quality accounted for less than 2%.

Per thredUP’s market report, online thrifting growth estimates are dramatically outperforming both brick & mortar thrifting as well as broader retail.

The Growth of Thrifting – Illustrated

In 2019, resale grew 25x faster than the broader retail sector…

…a growth trend that was aided by COVID, as shoppers found value and entertainment in thrifting…

Secondhand retail is taking market share…

…fueled in part by celebrities who believe secondhand is the future of retail.

Thrift is now mainstream, and thredUP’s new brand image is treating it as such:

thredUP’s brand pivot along with commentary by Mr. Reinhart was featured in an October 2020 CSA article:

“The perception of thrift has changed. Consumers are not only open to shopping secondhand, but they are wearing it proudly. ThredUP’s brand evolution acknowledges this shift from stigma to status, and celebrates our community of thrifters who are thinking secondhand first.”

thredUP - What’s the Risk?

If thredUP is a retailer with uniquely positive dynamics that also plays in an ESG-positive part of the consumer market that’s growing tremendously among Millennials and Gen Z, what’s the risk in this business model?

To start, cash flow out of the gates isn’t great:

Source: PETITION LLC

On a CFO – CapEX basis, thredUP burns more than $38mm of cash per annum. Taking a look at the income statement, thredUP’s Operating Expenses have been growing at a faster rate than Sales.

Source: PETITION LLC

Part of that slowdown may be due to the company’s forced revenue mix shift towards a consignment model. But COVID certainly didn’t help. thredUP notes that gross profit dollar growth and average contribution profit per order in 2020 both were lower than company estimates as a result of its COVID-19 response, which included higher levels of discounts and incentives and higher fixed costs per order. A Glossy interview with Fashionphile founder Sarah Davis indicated that resalers weren’t immune to lockdown-driven retail woes:

“According to Sarah Davis, founder of the Neiman-Marcus-invested resale platform Fashionphile, sales dipped considerably in March, but have risen each week in April, rebounding by more than 300% so far; sales are on track to be back at pre-coronavirus levels by May. But product from sellers has slowed to a standstill for a simple reason: Sellers don’t want to bring their bags of unwanted pieces to the post office while quarantined.

“Like all resellers, we are supply-constrained,” Davis said. “When things closed down, we thought people would have nothing better to do and use the time to clean out their closets. And that’s true. But the actual process of getting the product is the much harder task. Acquiring new product came to a crashing halt when we closed our warehouse [in March], which made it impossible to receive new product and really hard to process product that had already come in. And once it was back open, it was still hard to get people to go the post office to drop things off. So people had product they wanted to get rid of, but no way to get it to us. That was the big problem to solve.”

Whether thredUP’s logistics network is truly a groundbreaking, competitive advantage is up for debate. For one, the company doesn’t own its distribution centers and cannot guarantee supply, which in a space as competitive as resale may be problematic. Ms. Davis’ comments are telling:

“Luxury resale will always be supply-constrained,” Davis said. “People will always buy a Dior bag at a reduced price; the hardest thing is keeping the supply coming. It’s honestly a miracle that we have 20,000 items on the site, but each one of them came from individual people, so we absolutely need people to keep selling to us, whether it’s individual customers or even small business resellers, which sell to us sometimes. I would bet that for any reseller right now, the seller is where their focus is.”

A core strength of companies such as Amazon.com, Inc. ($AMZN) and recent IPO Coupang Inc. ($CPNG) is their logistics networks, which serve their customers quickly and efficiently. thredUP appears to be on the verge of successfully disrupting brick and mortar thrift. However, thredUP’s competition is fierce, including publicly traded resellers such as The RealReal Inc. ($REAL) and Poshmark Inc. ($POSH). The winner in the space is likely to be the reseller that best manages the supply constraint, and is able to create a friction-free environment for buyers and sellers. Logistics is the lynch pin of the resale business.

However, thredUP’s business model does differentiate it from other resale platforms. For example, thredUP’s total active management system is ideal for sellers who want a zero touch experience. This is a sharp contrast to Poshmark, which enables a seller to effectively run their own e-commerce consignment storefront. On Poshmark, sellers upload their own photos of the items they want to sell and determine their own pricing. These sellers can also leverage social media followings to drive sales.

Regardless of which platform is in vogue, we continue to think resale is a retail trend that has legs. Every dollar that goes into retail is coming out of online fast fashion like Zara Industria de Diseño Textil, S.A. ($IDEXF) and H & M Hennes & Mauritz AB ($HM-B.ST) or brick and mortar. Resale’s mainstream acceptance is being fueled by sustainability motives and endorsed by both celebrities and trendsetting, high fashion brands. Retail platforms are engaging with resale platforms like thredUP to explore new cross-selling opportunities. These drivers are accelerating growth. In its 2018 resale report, thredUP estimated the resale market to grow at a 15% annual CAGR from 2017 - 2022. In the 2020 resale report, the resale market is now expected to grow at a 39% CAGR from 2019 - 2024. If these estimates hold up, the HBS case studies of thredUP will need to be rewritten again to incorporate the foresight of its founders and a business ahead of its time.

And the narrative that brick and mortar retail destruction starts and stops with Amazon will need to become more inclusive of other factors. Just like we’ve been arguing since our inception.

💰Quantifying “The Amazon Effect”💰

In Sunday’s Members’-only edition we noted how, unlike certain other retailers that have found themselves in bankruptcy of late, Pier 1 Imports Inc. ($PIR) is almost certainly a victim of Amazon Inc. ($AMZN). Given the relative lack of debt and no private equity overlord, it seems that pundits have as clear-cut an example of “The Amazon Effect” as you can get.

This — coupled with the last few year’s of retail carnage — naturally begs a question about Amazon’s reach and market share.

Luckily, shortly before Christmas, Benedict Evans did a deep dive into Amazon’s business (using 2018 numbers). We’ll summarize it here but it’s worth a read in its entirety.

Discussing sales, Evans writes that in the US:

Amazon sold $77.5bn of products itself,

And also sold another $106bn for third parties,

Giving a total US [Gross Market Value] in round numbers of roughly $184bn. 

…$184bn sounds like a big number, but how does that compare to the competition? What market share would that give Amazon? 

The simple answer is that the US government gives a number for total ecommerce sales as an economic statistic: in 2018 the number was $522bn. Hence:

Amazon’s first party business had about 15% market share of US ecommerce

The third party business had about 20%

And the total GMV had a 35% share. 

Note the distinction he’s making between direct online sales and “third-party seller services.” The latter is Amazon’s “Marketplace,” where Amazon simply serves as an agent handling the logistics for third-party sellers.

Splitting out GMV is important because Amazon isn’t setting the price or choosing the selection for the third party Marketplace. This is especially relevant for any conversation about predatory pricing: Amazon is setting the price directly for 15% of US ecommerce, not 35%. On the other hand, some of those third party products will be competing with products that are sold and priced by Amazon, and setting their own prices accordingly. Life is complicated.

But Amazon doesn’t merely compete with online businesses and so the share numbers above aren’t entirely accurate — particularly in the context of discussions about monopolies and regulation. Amazon does compete, for instance, against physical retailers like Walmart Inc. ($WMT), Target Inc ($TGT) and Barnes & Noble Inc. ($BKS), as just some examples (and increasingly so, it seems, given the improving performance by the former two, especially). For this, you need to add in the effect of Amazon’s limited physical consumer goods stores, i.e., AmazonGo (11 stores), Amazon Books (18 stores), Amazon 4-Star (3 stores), and most importantly, WholeFoods (~470 stores). In 2018, physical stores accounted for $17.2b of net sales (for the sake of comparison, Amazon’s cloud offering, AWS, was $25.6b). And then, he notes, we need to compare the figure against total US retail (excluding auto, gasoline stations, restaurants, bars).

That leaves ‘addressable retail’ (i.e. excluding cars, car parts, gasoline stations, restaurants and bars) of $3.6tr in 2018.

Hence, Amazon US retail revenue of $200bn was about 6% of US addressable retail. 

(Incidentally, this means that $522bn total US ecommerce is about 15% of US addressable retail.) (emphasis added)

These are interesting numbers and support, in many respects, PETITION’s long-held position refuting the simplistic view that the proliferation of bankrupted retailers is the result of “The Amazon Effect.” Said another way, The Amazon Effect likely gets way more air time than it deserves. Right now anyway. Indeed, “in the USA in 2018, Amazon was a little less than two thirds of the size of Walmart.”

But:

…of course, Amazon is growing. Its US ecommerce business probably grew 20% in the last year, and so its market share of total and of addressable retail is going up. Hence, you could argue that since ecommerce is clearly going to take over a much larger share of retail, and since Amazon has a large (35-40%) share of ecommerce, Amazon’s strength in ecommerce means it will swallow everything else, even if it’s only at 5-6% today.

And this is to say nothing about how it has used data to sideswipe third-party sellers and promote its own private label brands at their expense — among other shady behavior.

Evans concludes:

I don’t think one can just assume that Amazon’s market share of online sales will be maintained indefinitely in a straight line into the future. The more that ecommerce expands beyond the original commodity categories, the more that we see new and different models and experiences proliferating. Shopify, another platform for online retail, is now at an annual run-rate of $60bn of GMV, up from nothing five years ago.

Of course, people have bet against Amazon in the past and we know how that’s worked out.

💩Retail, the Internet, China & Counterfeiting (Long Unscrupulousness).💩

This is a story about S’well. It illustrates just how vicious competition is today. And made even more vicious by (i) “signaling” and ease of discovery (lots of likes on Instagram), (ii) shady-AF Chinese manufacturers (producing legit product by day, extra off-the-truck product by night), and (iii) Amazon Inc.’s ($AMZN) failure to police third-party sellers. Choice bit:

Counterfeiting is an old game: In ancient Rome, counterfeiters knocked off authentic Roman coins. In recent decades, counterfeits of luxury products like handbags, watches, and sneakers have become commonplace. Now, though, online marketplaces like Amazon and social-media sites like Facebook and Instagram are enabling a new copycat ecosystem that’s become a hall of mirrors for both brands and shoppers. It’s never been easier for makers of knockoffs to reach consumers, project authenticity, and make money — and it’s never been harder for the real companies to regain control.

This is crazy:

…less than a year into starting the business, Kauss realized she had a big problem. Kauss and her then-boyfriend Jeff Peck (now her husband and the company’s president) were heading to S’well’s factory in China when they stopped for a couple days’ vacation in Hong Kong. Kauss saw there was a trade show and insisted on stopping by. When she arrived, it appeared that S’well had a significant presence at the show, with bottles displayed in a case and a ribbon flaunting an award it had apparently won. “A man came over to me and gave me his business card, very properly, and said he was from S’well,” she says. His card had S’well’s logo on it, with the little TM for ”trademark.”

The problem: Kauss at that point was running S’well from her apartment. It had no presence in Asia. Nor did it have a sales rep there. And it had no employees besides Kauss. She had barely gotten the company off the ground, and her bottles were being knocked off.

What. The. Hell. Read the piece. It’s long. And nuts.

But that’s not all. This is a horribly pervasive problem:

Last year, when the Government Accountability Office bought 47 consumer products like cosmetics and travel mugs online from third-party sellers on sites including Amazon.com and Walmart.com, it determined that 20 of them were fakes.

Here’s the problem from another vantage point (also very much worth reading):

I've been talking to a friend who's a cofounder at a womenswear ecommerce startup about their content strategy. I searched around to see what kind of stuff is out there about them (press mentions, reviews, etc.), and stumbled upon something odd. On a Bustle.com top ten sex toys list, it had listed a product from their brand. They do not sell sex toys. I clicked through, and it led to an Amazon site with their company’s branding. They do not sell on Amazon.

It turned out a China-based seller had “hijacked” their brand. This is apparently a regular thing.

A few days later, when visiting my friend's office, I found out that they had one staff member dedicated to monitoring Amazon for exactly these situations. There was a big spreadsheet where they tracked various culprits. There was a specific contact at Amazon they would call when they found shady stuff like this. They had a lawyer they billed, and a process in place to deal with this. It cost time and money and it was a never-ending game of whack-a-mole. It had become such an increasingly frequent problem over the past few years, yet they seemed fairly blasé about it. It was just business as usual.

I understand counterfeiting has always been a problem in retail, but this felt different. Amazon was their competitor. It had launched a private label brand that directly competed, undercutting them on price and shipping speed. Yet, Amazon also sold counterfeit items of theirs (well, Amazon “facilitated” it) and the startup bore the cost of cleaning up the trillion dollar company’s platform. I guess this was how ecommerce worked in 2019.

The article goes on to explain that this is the natural side effect of Amazon’s concerted efforts to court Chinese sellers to its platform. It explains the lack of quality control and…..

---

THIS IS A SUBSCRIBER’S POST, TO READ THE REST OF THIS ARTICLE, SUBSCRIBE TO OUR KICK@$$ BI-WEEKLY NEWSLETTER HERE.