RaaS will rise again, but the macro-economic crisis puts another obstacle in the way of platform provider thredUp

Sometimes you can’t seem to get a break. Back in ‘the old times’, a societal shift towards sustainability made the sector of the retail market known as Resale-as-a-Service look appealing to a certain breed of consumer. Then came the pandemic and suddenly (a) fashion retail was impacted negatively overall while (b) there were some underlying questions. As we noted last year:

In a climate of hand cleansing and sanitation, the provenance of an item of clothing might understandably become a matter of some concern for purchasers, however rational or irrational such a sentiment might be.

But as the world moves into the Vaccine Economy, things were looking brighter again for RaaS platform providers. Then came inflation and threat of recession and suddenly there’s a whole new complication on the table - people don’t have as much money to spend, even on items that are at a lower price point.

Such is the issue facing thredUP, one of the foremost RaaS platforms, where CEO James Reinhart admits:

We are facing a consumer environment that is much different than it was just two months ago. All the data that we're seeing indicates that consumer health is deteriorating, especially among the budget consumer, who makes up a meaningful portion of our customer base…the American consumer, and particularly the budget consumer, has pulled back on discretionary spending amidst today's economic climate. Inflation continues to squeeze the purchasing power of all with the wealthiest Americans. Recall that approximately 60% of our customer base has a household income below $100,000 and our customer data is telling us that this budget consumer is feeling particularly pinched.

Further to that, the firm’s data analytics indicate a seismic split developing between those consumers and the other end of the thredUP community, he adds:

We're witnessing a clear bifurcation of thredUp customers with premium shoppers trading up and value shoppers trading down. Year-over-year the average order value of the discount segment of our customers declined 7%, while our upscale shoppers average order value increased 15%. When we look at the items being purchased, the bifurcation is even more pronounced. The deep discount shoppers are trading down to items that are 24% less expensive and the typical budget shopper is trading down to items that are 8% less expensive. Meanwhile, the upscale shopper is doing the opposite trading up to items that are 8% more expensive.

To market

The problem here is that budget shoppers make up about a third of the overall customer base and a 23% decline in business between May and July in that space is a pain point. So bad news all round for the RaaS market, no? Not entirely, says Reinhart, who argues that the current macro-crisis proves the resiliency of the online marketplace model:

We're not a retailer or a direct-to-consumer e-commerce company. Unlike traditional retailers whose brand equity around pricing, inventory commitments and fashion manufacturing lead times can become a liability in a hyper-promotional and slowing macro-environment, our consignment structure and flexible responsive supply chain enable us to take minimal inventory risk. We don't set trends or have to bet on trends in many quarters into the future, we can let the data drive our decision-making. We think of every listed item in our marketplace as a snowflake, which means we have the flexibility to adjust our prices, seller payouts, processing cadence, recommendation algorithms and merchandising mix to adapt the consumer environment.

For example, if we see resilience in spending from higher income customers, we can adjust our assortment and pricing strategy toward items that are trading with that demographic. If customers are trading down into lower price goods, we can adjust our selection and payouts for those items to drive sell-through while protecting margins. One of the lessons learned coming out of the pandemic was how to flex our mix of goods to meet the moment. Right now, it's a prime example of how we can flex while traditional retailers have overbought and must work through a glut of inventory, we can more easily dial back inbound supply and shape our assortment from our customers to best match the forecasted demand environment. As macro-conditions begin to improve, we can dial back up our processing to meet the demand curve.

Improvements

For now, attention continues to be given to the customer experience, he adds:

Across our marketplace, our team is honed in on high impact, high conviction improvement to thredUp product experience that will pay dividends in the short and long term. First, it's all about delivering a world class shopping experience that keeps customers coming back. We offer a one of a kind catalog where fresh new items across thousands of brands, category, styles, and price points have listed every day.

With our expansive assortment one area we're particularly focused on its duration or building tools like visual filters, style matching algorithms, occasion based recommendations and mobile swiping favoring features to empower the customer to get exactly what she wants in an increasingly effortless way. If you've used a ThredUp app, you may have seen some of this already in beta form. Of course, we also remain disciplined on acquiring new customers and delighting them the first time they engage with thredUp.

My take

Inevitably Reinhart’s glass remains firmly half-full. He points to research conducted by third-party retail analytics firm, Global Data which finds that the resale market is expected to exceed $80 billion by 2026. There’s still activity going on. The firm just signed its latest big name fashion partner in the shape of Tommy Hilfiger which will use the thredUp platform in pursuit of its ambitions to become a ‘fully circular brand’ by 2030.

Things will pick up, concludes Reinhart and thredUp - and the RaaS business model - will be waiting:

While this is a challenging moment for the budget shopper in a discretionary category, the American consumer has proven to be incredibly resilient over time. And when discretionary spend comes roaring back, as it has in every other previous recovery, we will be poised to serve that surging demand with an incredible selection of great clothing in an ever improving marketplace with strong unit economics and with a meaningfully improved cost structure.