3 reasons why startups within online resale- and rental fashion platforms will struggle

The message that the fashion industry is the second most polluting industry globally finally seems to be catching up with the mass market in the western world. Resale is growing 21 times faster than retail and is expected to bypass fast fashion within the next decade.

However, the challenge in making secondhand and rentals a mass-market phenomenon is not only about convincing consumers. The struggle also lies in finding financially sustainable and scalable business- and supply models that can provide consumers with what they expect from online resale and rental shopping: easy access to quality secondhand clothing for a price they deem reasonable.

Online resale- and rental fashion platform startups are faced with three main challenges:

1. They are in direct competition with a struggling retail fashion industry

Gone are the days when apparel discounting took place mid-season and end of the season. With the constant influx of new stock and a challenging retail climate resulting in year-round sales, consumers have become accustomed to constant offers and consequently tend to only shop items when they are on discount. A discount of at least twenty to fifty percent has become all but expected. Comparing the options of either renting a designer outfit for a third of the full price for a week or buying it on sale for half price and keeping it and potentially even reselling it later, it is evident that the latter option is the rational choice.

As opposed to the resale industry, online retail can offer a much larger variety in sizes and colours of items, has better financial margins and established distribution mechanisms, and can afford to offer free delivery and returns to their customers. This, in turn, raises the bar for what a typical consumer expects from an online resale site.

2. Low margins and few indications on it improving

A seller of secondhand apparel often has an emotional connection to his/her items and biased perception of how much it is worth. Businesses mediating resale tend to have limited options to influence the pricing of items on their platform. At the same time, consumers buying secondhand usually have an opposite bias, and often see secondhand fashion shopping as a “bargain hunt”. Consumers expect the product to be unique, of good quality and significantly cheaper than what a new product would be.

Between a seller’s expectation of getting as much paid as possible and a buyer’s significantly lower willingness to pay, the average margin per transaction is often severely limited.

There are typically two business models used by most of the rental- and resale platforms. An unmanaged resale platform connects consumers with each other for buying and selling. Here customers stand for most of the works in listing and selling their products themselves. These are usually free of charge, however, once these platforms acquire enough users and transaction, they charge for value-added services like better product placements, ads etc.

The other model is common in managed platforms where the platform takes an active role in securing the quality of the items and stands for all logistics towards the consumer. Here a transaction fee that often lies in the range 10–30% of the sales price is charged for every sale.

To make matters more challenging, platform businesses are required to pay full VATs on their meagre earnings right from the start.

3. Creating and running an online resale or rental business is logistically complex and expensive

A resale- and rental business may typically have all or some of the following cost elements as part of their operations:

A. Physical presence, typically consisting of showrooms, warehouses, physical infrastructure, in-house staff etc. For example, online resale sites like Vestiaire Collective and Rebelle maintain middle warehouses where all products that are sold on the platform must pass through for a quality check. Physical presence may be good for creating a consistent user experience, but it drives costs and limits scalability.

B. Online platform. It is common for resale- and rental platform businesses to develop their own online platform from scratch, which requires specialized competence and large investments. For small-medium resale businesses, it is common practise to use standard e-commerce platforms like Shopify, Magento, Woo-commerce etc. to create their e-commerce sites, with a recurring fee.

C. Supply acquisition, which consists of attracting and acquiring individual- and professional suppliers as well as supply stock.

Some platforms like Rent the Runway purchase stock directly from designers, brands and other wholesale sources. Most other managed resale- and rental businesses are consignment based, meaning the supplier is paid only when the product is sold or rented out.

Additional complexity in resale is that there is typically only one of each item. This means that businesses need to devote a considerable amount of resources in order to acquire the volumes and variety in supply that is needed to satisfy the size, fit and style needs of the mass market.

D. Digital inventory. Creating and maintaining digital inventory entails taking photos of the products, creating descriptions including measurements, and uploading each item online.

The constraint of having only one of each product in resale raises the costs since one online product page corresponds to only one physical product. This is in contrast to regular retail, where one product page may represent hundreds of copies in different sizes, colours etc.

Some automation mechanisms for creating digital inventory exists, but are costly and can only be invested in by large businesses (f.ex. ThredUp* uses automated inventory creation).

Creating good quality digital inventory is tremendously important for stimulating purchase decisions. For platforms where this task is left to consumers, costs may be reduced, but often at the expense of the platform’s image and in turn its sales performance.

E. Logistics support including shipping, returns handling, cleaning, repairs and insurance (for rentals) etc. An unmanaged resale platform lets its consumers take care of logistics and skips the costs and complexity. On the other hand, a managed platform like Vestiaire Collective supports all logistics functions including delivery and returns with substantial costs, that are compensated from the same low margins mentioned above. Managed rental businesses are even worse off since they have twice the costs compared to resale since products have to be both delivered and returned and thereafter cleaned.

F. Marketing (direct, online, social media-organic, paid, influencer). Marketing is a matter of make-it or break-it for any fashion startup. Acquiring new customers and converting them into loyal, paying and returning customers is an art that is becoming increasingly difficult to master. There is a range of channels and mechanisms that need to be paid attention to and attended to.

It is hard and expensive to get the consumer’s attention, even more so in resale because of the factor of unique products. For example, one paid Facebook ad for resale corresponds to only one physical product, and therefore cannot be reused for advertising other products. The same challenge goes for influencer marketing as well.

The costs of paid marketing through social media and Google is steadily rising while the documented effect is becoming lower.*

Typically, a young startup business runs out of money before the critical mass of transactions vital to attract more sellers and buyers, as well as convincing investors, is reached.

The winner takes it all

In the end, buyers tend to go where they can find the most products while sellers tend to go where they know they can reach the most buyers. To survive beyond a critical mass of supply and demand, resale- and rental fashion businesses must be prepared to play a demanding and highly risky game and to invest aggressively. This would require investors who understand how marketplaces and the resale fashion economy works and allow companies to scale so that companies who choose a more conservative approach are left behind.

Start-up entrepreneurs should also be prepared to use a relatively large amount of time and resources on chasing venture money.

There is no reason to assume that these challenges will lessen or disappear any time soon. Rather, I believe that the situation will be aggravated as the struggles of the retail industry continue and consumers keep acquiring habits that will be difficult to change.

Next article:

My claims here are based on my own observations and experiences from establishing and running a start-up within the fashion resale and rental industry. My intention with this article is to initiate a discussion around mechanisms that play within the fashion industry that new start-ups need to understand and manoeuvre their way around to be able to succeed.

In my next article, I will move on to the areas of opportunities that could provide a work-around of the mentioned challenges.

Originally published on Medium in Sept 2019