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SPENDING MONEY TO MAKE MONEY

Fashion resale startups have more potential than profits

Luxury items for sale are displayed at The RealReal shop
Reuters/Mike Segar
The RealReal and other fashion resellers are still spending more than they earn.
  • Marc Bain
By Marc Bain

Fashion reporter

Published

The RealReal, Poshmark, and ThredUp are among the biggest companies to find success bringing sales of used fashion out of the thrift shop and putting them online. In the past few years, they’ve all grown substantially, buoyed by a surge in secondhand shopping. In 2019, The RealReal went public, and the other two followed this year.

But while the companies’ sales rise, consistent profits remain harder to come by.

On Aug. 9, The RealReal, which is focused on luxury fashion and operates on a consignment model, said its revenue reached $104.9 million for the three months through June 30, up 83% from the same time last year and 46% above its pre-pandemic level in 2019. Yet The RealReal also reported a net loss of $70.7 million, including $11 million it paid to settle a lawsuit alleging it misled investors about the rigor of its authentication process.

The following day, ThredUp announced a 27% increase in revenue to $60 million, as well as a loss of $14.4 million. Poshmark also reported its earning. Its revenue climbed 22% to $81.8 million, but it had a loss of $3 million.

The companies have slightly different business models. Like The RealReal, ThredUp now works on consignment, though it offers a broad selection of mass-market clothing. Poshmark, meanwhile, is a marketplace where users list items themselves.

But all are still working to turn a steady profit. Poshmark is almost an exception, having recorded net income of $16.8 million in 2020. But in the first six months of 2021, its losses have mounted.

Why it’s hard for fashion resale startups to make money

For startups to operate at a loss is common. Many do while they sink money into building their operations and chasing growth. And in fashion resale, the opportunity to grow is plentiful. ThredUp, for one, predicts the secondhand market will more than double by 2025, reaching $77 billion. It has an interest in presenting a rosy view of resale’s prospects, but other sources, such as Boston Consulting Group, also forecast strong growth ahead, driven by shoppers looking for a cheaper and more sustainable alternative to buying new.

If resale companies want their businesses to be sustainable, they can’t lose money forever. Right now it’s unclear how long it will take them to start earning more than they spend.

“The first hurdle for the resale market is proving that it can be profitable,” analysts at Bernstein, an investment firm, wrote in a note to clients in October. “Merchandise margins are high, but we do not see a quick path to overall profitability.”

Consignment businesses in particular have a number of operations costs, the analysts said. They have to track every unit of inventory, photograph and list each item, and pay the seller their share of any sale. Some, such as ThredUp, may cover the consigner’s costs to ship clothing to them. A business like The RealReal also has to authenticate every product.

“The long-term hope for these businesses is that advancements in technology will help to automate some of these processes, which today remain rooted in labor intensive practices,” the analysts wrote. The RealReal has started using automation for tasks such as pricing and copywriting (pdf), while ThredUp is storing its inventory in semi-automated facilities to speed up processing.

Poshmark’s operational costs are generally lower, though it’s spending heavily on marketing to keep attracting shoppers.

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