Walmart Wants to turn Rags into Riches

Used clothing may be tried, but it is still true. Even amid a pandemic, the retail giant wants in.

Caption and Graphic courtesy by Wall Street Journal

By guest authors Jinjoo Lee and Laura Forman from Wall Street Journal

Americans are so hot for used clothing that they will even buy it during a pandemic. At least that is what Walmart is betting.

The retail giant last week announced it is getting into secondhand clothing through an e-commerce partnership with global fashion resale platform thredUp. While the coronavirus pandemic might hamper sales in the near term, the promise of consignment shopping amid a deteriorating economic backdrop seems too compelling to ignore. The challenge will be making the math work for the home of everyday low prices for new goods.

Consignment retail startups have come alive since the Great Recession, prompting the launch of websites and apps like thredUp, Tradesy, Poshmark and The RealReal, REAL +1.83% aimed at modernizing the resale market eBay pioneered back in the mid-90s. A 2019 report from thredUp projects the U.S. resale apparel market will grow to USD 23 billion by 2023 and the company says overall secondhand apparel has grown 21 times faster than the retail apparel market in the past three years.

ThredUp has been adding partnerships with major retailers for some time now, including Gap, Abercrombie & Fitch, J.C. Penney and Macy’s. Luxury consignor The RealReal raised USD 300 million last year in its initial public offering, highlighting a huge opportunity cost for retailers missing out on the resale market. Over the last 10 years, thredUp has itself raised over USD 300 million in private funding, while Poshmark and Tradesy have raised more than USD 150 million and USD 75 million, respectively, according to S&P Global Market Intelligence. KeyBanc analyst Edward Yruma said retailers are looking at “recommerce” as the next off-price trend, noting “nobody wants to miss it.”

While Walmart and thredUp say they have been working out the terms of the partnership for about a year, the timing of the launch is inauspicious. In a world where many are still madly sanitizing even new packages, a global pandemic is hardly a prime time to expect customers to buy used clothes. ThredUp Chief Executive Officer James Reinhart noted some initial impact on demand due to the pandemic in early March. Like all retailers, thredUp has had to grapple with issues at distribution centres such as enhanced hygiene and social distancing for its workers.

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But it seems the desire to bargain shop has been deferred, not destroyed. Mr. Reinhart says sales rebounded in the latter half of March and are now accelerating. Adele Meyer, executive director of The Association of Retail Professionals, says resale attracts people on both sides of the transaction as a way to get the most value for their dollar during difficult economic times. Indeed, an April survey at the height of the pandemic from thredUp shows 82 % of consumers have or are open to shopping secondhand during lean times.

It is a big bet for Walmart, which says it is working toward becoming a destination for fashion in its own right. It will kick off the partnership with 750,000 thredUp pieces. But while it seems bargain shoppers multiply during an economic downturn, the crucial question for Walmart will be what percentage of those shoppers are looking for bargains in used nonluxury brands. For Walmart in particular, pairing used with new goods could easily result in cannibalization.

Then there is the matter of plenty of unsold new inventory right now. Even The RealReal, which sells luxury secondhand goods, is vulnerable to markdowns elsewhere. Its chief executive has pointed out that discounting at department stores depressed prices of secondhand goods sold by The RealReal.

Margins on small transactions are also a question. But while the companies haven’t disclosed which party will be financially responsible for the costs of shipping and free returns, it seems to be a relatively low-risk venture for Walmart, which is playing the role of a listing platform while thredUp is handling photos, sorting, processing, shipping and fulfilment.

Consumers looking for deals on lower-tier brands may include those who don’t have reliable shipping addresses, credit cards, high speed internet or the ability to pay USD 35 on a single transaction, the minimum purchase threshold to qualify for free shipping from Walmart. The average price of an item in the Walmart partnership is USD 20.

Walmart’s sheer economies of scale may work to its advantage: The risk of losing money in the short-run is modest compared to the opportunity cost of missing resale altogether.