The Economics and Operations of Vintage Clothing

I have three kids who are smart, hardworking, and also stylish (something they didn’t get from me…). Over the last few years, I’ve noticed that their clothing comes from vintage stores rather than traditional ones. I’ve also noticed that they’re not alone in this…

It’s a broader trend where pre-owned clothing has surged in popularity, buoyed by its “cool” (a boomer term … I know) reputation and the appeal of sustainability. In an article a couple of months ago, the BBC wrote:

“In the past decade, buying used fashion has become normalised and even glamorised, with celebrities getting in on the action through swaps and sales of their pre-owned designer clothing. Shoppers are paying TikTok stylists hundreds of dollars for ‘bundles’ of thrifted clothing, and the fashion sponsor of the popular British reality show Love Island switched from a fast-fashion brand to eBay.”

However, the economics of the vintage market present significant challenges, with many companies in this sector struggling to turn a profit.

Two firms, ThredUp and The RealReal —each occupying different industry segments— exemplify this through their stocks:

Today’s article explores the vintage clothing market, the firms’ scalability (focusing primarily on ThredUp), and any implications regarding sustainability.

Is it a Good Market?

One must start with the obvious question.

I tend to delve into firm operations using my frameworks or academic papers, but this time I’ll use a classic: Porter’s Five Forces. Understanding this market through this lens provides insight into the competitive dynamics at play:

Threat of New Entrants: The barriers to entry are relatively low. Many individuals and small businesses can start selling vintage clothing with minimal upfront investment, particularly through online platforms like Etsy, eBay, and Depop. 

Suppliers’ Bargaining Power: In the context of vintage clothing, suppliers are individuals who sell their pre-owned clothes. Since there’s an oversupply of second-hand clothing, their bargaining power is relatively low. 

Buyers’ Bargaining Power: In contrast, buyers have high bargaining power due to the availability of numerous alternatives, including new, often cheaper, fast-fashion items. While bargaining is not an option with ThredUp specifically, it is allowed at any other vintage store, so further pressure is placed on the ThredUps of the world.

Threat of Substitutes: The threat of substitutes is significant as consumers can easily opt for new clothing, especially from fast fashion brands that offer trendy styles at low prices. 

Industry Rivalry: The vintage clothing market is highly competitive, with numerous players ranging from local thrift shops to large online platforms. This intense rivalry leads to aggressive pricing strategies and marketing efforts, often at the expense of profitability.

So overall, it’s not a good market. 

But it’s big and growing, which, as always, invites more players to try to solve these issues on a larger scale. 

Why Vintage Clothing is Operationally Challenging

A firm’s profitability depends on its market (which we agreed above is tough) and its ability to execute well, i.e., acquire customers efficiently and deliver value efficiently.

The problem is that this market also presents significant operational challenges. Companies like ThredUp face complex logistics, high processing costs, and scalability concerns, making it difficult to achieve profitability. 

To understand this market better, let’s delve deeper into these firms’ operations. 

Notice that I’m not considering the plethora of small goodwill stores or thrift stores, as their economic incentives are different —they don’t mind living on the verge of profitability. For such a market to be viable long term and become part of the solution for a more sustainable supply chain, we need greater efficiency, which is exactly what bigger firms like ThredUp and The RealReal are trying to achieve. 

ThredUp will be the focal firm for this analysis, so I’m providing a few details below:

Founded in 2019, ThredUp is a B2C second-hand apparel resale platform. Initially, ThredUp sold its own inventory but quickly transitioned to a consignment model within the first year. By 2023, 66% of its revenue came from consignment sales, while the remaining 34% was generated from its owned inventory.

ThredUp charges various fees, such as a service fee deducted from earnings, and fees for premium services like expedited processing. If items are not sold within a specific period, the seller can either donate them or request them back by paying a fee. This consignment approach allows ThredUp to manage a large and diverse inventory without the financial risk of purchasing items outright.

What are the operational difficulties? 

Supply Chain Complexity and High Operational Costs

Oversupply of Low-Quality Clothing: One of the major challenges is the oversupply of low-quality garments. With the rise of ultra-fast fashion brands, consumers purchase and discard clothing at unprecedented rates. As previously discussed, many of these discarded items are of such poor quality that they are unsuitable for resale. For instance, a study found that one large Swedish charity has to pay to incinerate 70% of donated clothing because the quality is too low to sell or export. 

Labor-Intensive Processing: Processing second-hand clothing is highly labor-intensive. Each item must be individually assessed, cleaned, repaired (if necessary), and listed for sale. This requires human touch and a human eye to ensure quality and condition, making the process costly and time-consuming. The BBC article quotes Liz Ricketts, co-founder of The Or Foundation, who emphasizes that reuse is based on the quality and condition of the individual item, necessitating significant effort to re-commodify donated goods.

Distribution Center Constraints: ThredUp and similar companies face significant constraints in their distribution centers. These centers must handle vast volumes of single-piece items. This requires extensive space and sophisticated inventory management systems. ThredUp, for instance, processed 24.7 million items on its platform in 2020. Despite increasing their distribution capacity, ThredUp has struggled with processing delays, leading to the introduction of processing fees to manage backlogs.

Reverse Logistics: As we’ve already discussed, moving goods from customers back to sellers or manufacturers is inherently complex and costly. ThredUp’s model involves receiving clothing from sellers, processing each item, and listing them for resale. This reverse, single-SKU fulfillment process is highly inefficient and expensive. Increased labor costs further exacerbate these challenges, often pushing the price of second-hand clothing above that of new items of similar quality.

High Costs of Storage and Logistics: This is more specific to The RealReal, who specialize in luxury items, which often require special handling, storage, and logistics to maintain their condition. The RealReal has invested in large, state-of-the-art facilities to manage and store such items, adding to the overall cost structure. Additionally, the logistics of shipping luxury goods, ensuring safe delivery, and handling returns are complex and expensive.

Quality Assurance and Inventory Management

Ensuring Quality and Authenticity: Maintaining quality and authenticity is crucial in this market. ThredUp differentiates itself by processing and screening items in-house to ensure they meet quality standards. This operational model increases consumer trust but also adds to the costs. Unlike peer-to-peer platforms like Poshmark, where sellers are responsible for listing and describing items, ThredUp bears the cost of ensuring that each item matches its description and is in good condition.

The RealReal’s business model relies heavily on the authentication and verification of luxury items. Each item undergoes a rigorous authentication process to ensure its legitimacy; a time-consuming and costly process. This need for detailed, labor-intensive processing increases operational costs significantly.

Inventory Turnover: While these firms don’t always have inventory on their balance sheets, efficient inventory turnover is vital for profitability. ThredUp needs to manage its inventory to ensure a steady flow of items through its platform. Delays in processing can lead to backlogs, reducing the availability of fresh items for buyers and potentially driving customers away. With oversupply and more picky demand, this isn’t trivial. 

And as we can see, the turns for ThredUp haven’t improved over the years:

But the main problem is that things won’t easily improve with scale.

Scalability Problems

ThredUp has faced significant challenges in scaling its operations profitably.

​​The data shows a hint of scalability in 2023, but the COGS are growing faster than before, and faster than its revenues:

Why?

Supply-Side Economies of Scale: Signs of Potential Scalability

ThredUp has two primary supply sources: individual sellers and enterprises through its Resale-as-a-Service (RaaS) clients (which eventually originate from individual sellers). Sellers can be attracted directly by ThredUp or through the RaaS brand partners (see below). In the latter case, customers can earn either cash or brand credits by sending out a CleanOut Kit, which comprises second-hand clothes from various brands, with ThredUp handling the sales. 

The sales revenue from brand partners is considered consignment revenue. And while specific data on the number of sellers brought in by brand partners and the revenue generated from processing CleanOut Kits is unavailable, following the shift to the consignment model in 2019, there was significant growth in consignment revenue (from $39 million in 2018 to $138 million in 2020). During this period, active sellers increased from 332K in 2018 to 446K in 2019 before slightly decreasing to 428K in 2020. Consequently, consignment revenue per seller rose from $118 in 2018 to $322 in 2020.

From a cost perspective, ThredUp doesn’t allocate marketing expenses directly to target sellers. Therefore, if the number of active sellers continues to grow, some economies of scale should be achievable (we can see the operating expenses starting to level out in the graph above) but limited. 

The increase in brand partnerships, from 21 in 2020 to 43 by the end of 2023, suggests the potential for attracting more sellers and, with it, improved profitability. 

Demand-Side Economies of Scale: Lack of Scalability

On the demand side, ThredUp faces challenges in achieving economies of scale through network effects. In 2020, 47% of the 428K sellers were also buyers. Converting sellers into buyers can help reduce the marketing customer acquisition cost. Once a buyer purchases items, the seller receives funds either through a cash payout, ThredUp online credits, or select RaaS partner credits. In 2020, ThredUp online credits accounted for 17.6% of payouts, and RaaS partners accounted for 2%. This indicates that nearly 20% of sales revenue is reinvested into the platform, showing a slight possibility of achieving economies of scale from the demand side. However, scalability will remain limited unless there’s a significant increase in sellers and a higher seller-to-buyer conversion rate (something ThredUp seems to be struggling with) —although the marketing customer acquisition cost (CAC) dropped 24% from 2020 to 2021, active buyer numbers declined in 2022 despite stable marketing expenses, indicating poor retention.

ThredUp’s financial performance has shown an upward trend in revenue but remains constrained by high operational costs. The company has attempted to manage these costs by introducing processing fees and investing in new distribution facilities. 

Conclusion: The vintage clothing market presents numerous operational challenges that complicate the path to profitability. From managing an oversupply of low-quality items and high processing costs to ensuring quality and retaining customers, companies like ThredUp must navigate a complex landscape. 

Tough market. Tough execution. 

Let’s hope it continues to grow.

The Surge of Vintage Stores: A Cyclical Trend or a Lasting Shift?

I indicated above that the market is expected to grow. 

But is this really the case?

The recent surge in vintage stores can be attributed to several factors, ranging from environmental concerns to cultural shifts and technological advancements. These same factors, and the way they develop, will also determine whether this surge is a cyclical trend or a lasting shift.

Environmental Concerns: One of the primary drivers behind the rise of vintage stores is the growing awareness of environmental issues associated with fast fashion. The fashion industry contributes to global pollution, responsible for up to 8% of carbon emissions and substantial water pollution from textile dyeing processes. Consumers, particularly younger generations like Gen Z and millennials, are increasingly prioritizing sustainability in their purchasing decisions. This shift is reflected in the growing popularity of second-hand clothing to reduce their wardrobes’ environmental footprint.

Economic Factors: Economic considerations also play a crucial role. The financial instability caused by events like the COVID-19 pandemic and the surging inflation has led many to seek more affordable clothing options. Vintage stores offer quality clothing at lower prices, making them an attractive alternative to new, often expensive fashion items. Additionally, economic downturns historically lead to increased interest in second-hand markets as people look for cost-effective ways to shop.

Cultural Shifts and Nostalgia: Cultural trends and nostalgia significantly influence the surge in vintage clothing. The styles of past decades have become fashionable again, with many consumers seeking distinctive pieces that stand out from mainstream fashion. Influential celebrities and fashion icons often sport vintage clothing, further glamorizing the trend, with influencers and stylists showcasing their curated finds and encouraging followers to explore second-hand shopping.

Technology: Technological advancements have made it easier for consumers to buy and sell vintage clothing. Online platforms like ThredUp, Depop, and Poshmark have streamlined the process of listing, buying, and shipping second-hand items. These platforms offer a convenient and accessible way for consumers to engage in the vintage market, contributing to its growth. The rise of e-commerce has expanded the reach of vintage stores, allowing them to attract a global customer base.

Community and Identity: Shopping for vintage clothing is often seen as a way to express individuality and build a unique personal style. It also fosters a sense of community among like-minded individuals who value sustainability and creativity. Vintage markets, pop-up shops, and online communities provide spaces for people to share their passion for fashion and sustainability, further driving the popularity of vintage stores.

While certain aspects of the vintage clothing surge may be cyclical, driven by fashion trends and economic conditions, strong indicators suggest a lasting shift. The growing awareness of environmental issues, technological advancements, and cultural changes point to a sustained interest in vintage fashion. 

I’m no fashion expert, but I think the vintage clothing market will remain a significant segment of the fashion industry, driven by a new generation of consumers committed to sustainability and unique style. 

Implications for Sustainability and Reverse Logistics

The viability of this market goes beyond just having one more avenue for people to buy clothing. 

As indicated already, the vintage clothing market is inherently linked to sustainability, offering a solution to the environmental impact of fast fashion. However, the current operational challenges highlight the need for more robust reverse logistics and sustainable practices.

Environmental Impact: Second-hand clothing reduces the need for new garment production, lowering the fashion industry’s carbon footprint and water usage. However, the oversupply of low-quality garments poses a significant challenge. Many items are of such poor quality that they cannot be resold and end up incinerated or in landfills.

Reverse Logistics: Processing second-hand clothing is labor-intensive and costly. Companies like ThredUp have invested in proprietary software and systems to handle large volumes efficiently, but these operations are expensive and complex. Innovations in sorting and recycling technologies, such as scannable garment tags, could reduce labor costs and improve profitability.

Policy and Market Dynamics: For the vintage clothing market to succeed, there may need to be a shift in policy and market dynamics. Government regulations promoting recycling and reducing new clothing production could help balance supply and demand. Additionally, funding for capital-intensive sorting and recycling infrastructure, similar to other climate-focused initiatives, could support the growth of the second-hand market.

Bottom line 

The vintage clothing market holds economic and environmental potential, driven by consumer shifts toward sustainability. However, the challenges in achieving profitability and scalability are substantial. Companies like ThredUp demonstrate the complexity of operating in this space, balancing growth with operational efficiency and sustainability. 

By addressing these challenges through innovation, policy changes, and strategic partnerships, the vintage clothing market can continue to grow and contribute positively to the environment.

Who thought it’d be our kids’ fashion sense that would help save our planet…?