ThredUp - (NASDAQ: TDUP)
ThredUp is a resale marketplace focused on selling used clothing. ThredUp operates using a consignment model where sellers are only paid if clothing is sold.
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ThredUp primarily competes in the clothing/fashion industry alongside other large retailers, other social/resale platforms like Poshmark, TheRealReal, and other offline alternatives such as through Instagram DMs (I’ve seen women set up secondary accounts looking to sell clothes), Craigslist, garage sales, etc.
ThredUp has two primary business offerings. First, ThredUp is a managed resale marketplace that operates a consignment model similar to TheRealReal. In 2019, ThredUp made the decision to focus more on consignment revenue than product revenue. Consignment revenue comes with higher gross margins and ThredUp doesn’t face as much inventory risk since customers get paid only if the clothing sells. This explains why product revenue has been decreasing since 2018. Consignment revenue accounts for 80.3% of total revenue as of Q1 2021.
The second business offering is ThredUp’s Resale-as-a-Service (RaaS) which helps brands and retailers control the reselling of their products. Companies such as eBay, Walmart, Everlane, Gap, and Athleta all work with ThredUp. While this is a small part of the business today, only working with ~21 partners, I think this could be a large opportunity if execution is successful. I talk about this more below.
Total Addressable Market
Historically I don’t think resale has been a large market but I think there are some tailwinds driving more dollars into this industry. I think more people are shedding some clothes in their closet and only looking to keep what they wear. These are just my thoughts and I don’t have data on this.
I think people are also becoming more aware of how often products are made and then thrown away and just sit in landfills or dumps. People are becoming more mindful of the environment and they understand why not buy or sell used clothes instead of spending more money on new clothes and also this activity likely helps the environment.
The graph above is directly from ThredUp’s investor presentation so it will be biased.
There seems to be a lot of competition in some new online marketplaces whether it be social marketplaces like Poshmark or managed marketplaces like TheRealReal, Farfetch and a handful of others. Once again, if ThredUp can become the largest resale marketplace, it can likely keep competitors away.
Barriers to Entry
ThredUp’s infrastructure may be tough to replicate. In a nutshell, ThredUp sends empty bags to customers. These customers pick the clothes they want to sell and put these clothes in the bags and ship it back to ThredUp. ThredUp then sorts what clothing is good enough to be sold and what’s not.
From an initial glance, this seems like a hard business model to scale and is certainly not a business I’d want to start. This might give it an advantage over its peers. ThredUp does have 75%+ gross margins on its consignment revenue which shows this business has properly scaled and overcome some of the fixed costs embedded in its infrastructure.
The image below is a quick screenshot of the important KPIs for ThredUp. One thing I’d like to note is that the line item, “Orders per active buyer” for both Q1 2020 and Q1 2021 are annualized. The formula is therefore:
(4 x Orders) / active buyers.
This shows how this line item is trending throughout the year.
A quick look above shows tremendous growth in consignment revenue. From a very shallow look people might be disappointed with total revenue growth, but consignment growth is rather strong both before and during the pandemic.
I think this is an interesting idea that’s kinda out there in terms of being accepted or not. For example, what if ThredUp was able to create a solution that enabled all merchants to have a resale process instead of buying a new product? Think of all the merchants on Shopify that sell a product that could be reused or be sold resale? Furniture, clothing, and other areas are likely good verticals for ThredUp to go after. RaaS basically gives brands and retailers the ability to own both new and used inventory.
While I think the resale market is likely to grow over the next handful of years, I would like to see more unbiased data showing this to be the case. I think the current size of this market could also be larger than is currently reported because some of the buying and selling of clothes seems to be done through friendships, DMs, garage sales, or through other channels offline.
Learning more about the supply chain process
While I think the process of picking out and taking pictures of clothing is hard to replicate, I’d want to dive more into this process and exactly how tough it may be for competitors to copy this process. ThredUp was founded in 2019 which likely gives it some head start versus competitors but a head start can only be so much if billions of dollars are thrown at this problem.
ThredUp is another interesting company. I’m interested to see how ThredUp does post-COVID and whether it’ll enjoy any permanent benefits from the pandemic.