Balancing environmental protection and profit making

Dr. Winnie Tang December 19, 2022 09:23

In recent years, recommerce market has expanded rapidly, and this wave has also spread to luxury goods.

The Economist reported that the sales value of resale clothing in 2021 was about US$15 billion, compared with less than US$1 billion in 2013, the growth rate is impressive. Together with the spending of US$21 billion on garments from charity and thrift shops, the total spending on secondhand clothing was about US$36 billion, slightly higher than the US$30 billion spent on fast fashion brands such as Zara or H&M. By 2025, the value of resold and thrifted clothing will climb to US$77 billion while fast fashion will only grow to just US$40 billion, estimated by GlobalData, a research firm.

This wave may threaten sales of new luxury items too. According to the statistics of Bain & Company, a research institute, secondhand luxury sales were up 65% in 2021 relative to 2017, while the sales of new luxury goods increased by only 12%. In the next five years, the annual growth rate of secondhand luxury sales is predicted to be around 15%, double the expected rate of new sales.

As long as it is relatively new and free of wear and tear defects, luxury goods can be resold for about three-quarters of their original price. At present, first-tier luxury brands such as Hermes, Louis Vuitton, Chanel, do not participate in the resale business. However, some industry players such as Gucci, Jimmy Choo, Burberry, see it as an opportunity. Stella McCartney is one of them, the founder of the brand told the media in 2019: “There’s $500 billion worth of waste in the fashion industry every year, and that, to me, is a business opportunity.”

The RealReal (TRR), an online platform of secondhand luxury goods also seized this business opportunity and was listed in 2019 to raise US$300 million. It was the first listed company in the circular economy, followed by Poshmark and thredUp in 2021. Carousell, an online marketplace founded by several Singaporean university graduates, and is popular in Hong Kong, was also valued at US$1.1 billion last year. It has become another unicorn with a valuation of more than US$1 billion in Southeast Asia.

However, like other sharing economies, this new business model has been put to test in the global downturn. TRR claims to have the most rigorous authentication process of each luxury goods it sells, which may be a heavy cost burden. Its stock price has gotten a steep markdown, with growing losses alongside rising revenue, the founder and CEO had to step down in the middle of this year. As for Poshmark and thredUP, their values have dropped by 78% and 93% respectively since their listing. In early October, Poshmark was sold to Naver Corp, a South Korean internet company, for US$1.6 billion, a discount of nearly 80% compared with its peak market value of US$7.3 billion.

To pursue both environmental protection and profitability, the business model of the circular economy has not yet matured. Just like the Garment to Garment (G2G) recycle system developed by the Hong Kong Research Institute of Textiles and Apparel which uses artificial intelligence and machine learning to convert old clothes into fibers, and then spin them into new clothes. However, such a meaningful project can only serve a small number of people. How to achieve low price and high quality, while satisfying the public in reusing waste materials? This urgently requires young people to provide the answer with their imagination and innovative ideas.

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Dr. Winnie Tang

Adjunct Professor, Department of Computer Science, Faculty of Engineering; Department of Geography, Faculty of Social Sciences; and Faculty of Architecture, The University of Hong Kong