The "Big Secret" of Secondhand Resale: It May Depend on Physical Stores

Today, it's hard to find a retailer or brand that hasn't tried secondhand resale. Rather than figuring it out themselves, most businesses turn to third-party platforms specializing in secondhand e-commerce, putting their success or failure in someone else's hands.

Selling secondhand goods online has proven to be inefficient and difficult to make profitable. Experts say that despite strong resale growth, this segment is largely better suited to brick-and-mortar stores.

As secondhand sales continue to grow, resale platforms vying for brand partnerships are gearing up. ThredUp operates its own secondhand clothing website and is rapidly building its "Resale-as-a-Service" platform, which Wells Fargo analysts believe could have greater profit potential than its core business. By the end of last year, the company had over 40 clients, including H&M, J. Crew, Francesca's, Kate Spade, American Eagle, and Target.

Competitor Trove operates a similar recommerce platform, with a client list including Canada Goose, Carhartt, On, Lululemon, Patagonia, REI, Levi's, Arc'teryx, and Allbirds. Another resale provider, Recurate, partners with brands such as Michael Kors, 7 For All Mankind, Clare V., Juicy Couture, Apparis, Peak Design, and Moosejaw. According to Trove's latest Resale Brand Index, apparel dominates resale, with outdoor brands especially inclined to rent or sell used gear.

"The reality is that brands and retailers are truly realizing that consumers are actively participating in buying secondhand goods."

—Anthony Marino, President of ThredUp

Given the explosive market growth, this surge is easy to understand. In the latest annual forecast from ThredUp and research firm GlobalData, the resale market is expected to reach $350 billion globally and $70 billion in the U.S. by 2027, nearly double last year's totals ($177 billion globally and $39 billion in the U.S.).

"The reality is that brands and retailers are truly realizing that consumers are actively participating in buying secondhand goods," ThredUp President Anthony Marino said in a phone interview. "So they start asking themselves: 'What should our resale strategy be? Because our customers are participating in this market.'"

According to research from ThredUp and WD Partners, consumers are drawn to secondhand goods for their value (especially during times of high prices), perceived sustainability benefits, and the thrill of discovering unique items. WD Partners found that the benefits for retailers are equally diverse, including driving foot traffic to physical stores, and retailers of all sizes, formats, and categories are eager to offer this option.

The crux: Can it actually be profitable?

But resale has its downsides. Latest estimates show growth rates and scale are lower than ThredUp's forecasts from last year. More critically, profitability remains elusive.

Despite healthy and growing demand for secondhand goods—WD Partners found that 92% of U.S. consumers shop, buy, sell, or trade secondhand items at least once a year—e-commerce players in this space struggle to achieve or sustain profitability. ThredUp's gross profit fell 7% to $45 million in its most recent quarter, gross margin contracted from 66.1% to 63.1%, and net loss widened 8.9% to $19.5 million.

Luxury resale e-commerce company The RealReal may face bankruptcy risk; although it recently narrowed its long-standing losses, it only did so after drastic measures such as layoffs, store closures, the sudden departure of its founder, and major strategic shifts. Online secondhand marketplace Poshmark saw widening losses for several years after going public and was acquired last year by South Korean internet giant Naver.

It remains unclear whether Trove and Recurate (both venture-backed) are profitable on a net income basis. Trove founder and executive chairman Andy Ruben said in an emailed statement that the company cannot comment on the profitability of its own or partners' resale programs. Recurate declined to say whether the company is profitable, but a spokesperson said via email that thanks to resale's contribution to brands' marketing efforts, including customer lifetime value, upsell capabilities, and attracting new customers, its partners' resale programs deliver a "2.5x return on investment."

Some online resale companies have achieved or are nearing profitability. Luxury resale marketplace Farfetch saw its after-tax profit shrink 77% last year to $344.9 million after a $176.7 million after-tax loss in the fourth quarter. ThredUp President Marino said the company is on track to achieve adjusted EBITDA profitability in the second half of this year.

"We've been consistent in our messaging to investors and the market—we will be profitable in the second half of the year," he said on the call, noting the company's fourth-quarter adjusted EBITDA improved 800 basis points from the third quarter. "We believe that demonstrating this solid performance and pursuing sequential improvement shows we are successfully navigating a difficult macro environment while delivering exceptional value to both buyers and sellers."

"Receiving items, cataloging them, determining whether they can be cleaned and repaired, attempting to clean and repair them, writing descriptions, photographing them, uploading them—these steps consume an enormous amount of time."

—Scott Kuhlman, CEO of ReCircled

About three years ago, ReCircled started out like other platforms, providing resale technology and infrastructure to brands. But the company has since pivoted to more profitable and sustainable ways of reusing old clothing, including converting it into textiles for apparel manufacturers or composite materials for construction and home goods. ReCircled CEO Scott Kuhlman said resale is an important part of fashion circularity but accounts for only a small portion of the company's business. However, upcycling and reusing clothing and footwear on an industrial scale is not only more profitable but also ensures more items stay out of landfills. Kuhlman founded the company after years in the textile industry.

"We started with the end in mind, with a goal of zero landfill," he said in a video call. "After processing millions of items over the past few years, we've learned that time management is key. Especially in resale, receiving items, cataloging them, determining whether they can be cleaned and repaired, attempting to clean and repair them, writing descriptions, photographing them, uploading them—these steps consume an incredible amount of time."

Resale works best in local brick-and-mortar stores

Lee Peterson, executive vice president at WD Partners and a veteran retail executive, said companies like ThredUp and Trove and their brand partners cannot escape the complexity of secondhand retail, nor the reality that resale is only sustainably profitable in physical stores.

In the early 20th century, automotive legend Henry Ford ushered in an era of high productivity and efficiency. His ideas, especially around the rapid, low-cost flow of goods in supply chains, have permeated most areas of business, including retail.

Although the pandemic exposed retailers' vulnerabilities in this regard, retailers across categories continue to refine their ability to deliver the optimal number of SKUs to stores and warehouses. Resale—where items arrive one at a time, each varying in color, size, and condition—upends this model, Peterson said on the phone, describing how he worked as a buyer at The Limited years ago.

Play It Again Sports sells used sporting goods and apparel and is one of the consistently profitable franchise brands under Winmark.

Image credit: Daphne Howland/Retail Dive

"We wanted to buy a certain vest, sourcing it from two or three factories on the Pacific coast at a specific price. They delivered 100,000 units, and we allocated them to 600 stores," he said. "Getting the goods to each store was a relatively simple process, and we made a fortune doing it. But in resale, I'm dealing with one item—just one—in a single size, inspecting it, photographing it, uploading it. It's extremely labor-intensive, and it's counterintuitive for almost every retailer today."

However, this process works in physical stores because staff are trained to accept items that suit local customers, Peterson said. He once ran a record store that sold both new and used goods. To ease the difficulty of sourcing used inventory, stores can flexibly adjust the range of items they accept and the prices they pay, Kuhlman said, making the operation highly efficient.

"Localized resale works—both environmentally and financially. It works so well that there's no need to disrupt it, frankly," Kuhlman said. "There's nothing broken about this system. So we should think about where we really need to focus our efforts."

Winmark Corp. CEO Brett Heffes said resale e-commerce can be profitable at certain price points. Winmark is a franchising company whose brands include secondhand retailers such as Play It Again Sports, Plato's Closet, Music Go Round, Style Encore, and Once Upon a Child. The company is consistently profitable, with net income of $39.4 million last year, roughly flat year over year.

"Customers come for convenience, sustainability, and the treasure-hunt experience. That's what makes the stores the driver."

—Brett Heffes, CEO of Winmark

"The store is a locally owned acquisition center whose primary role is marketing and advertising—'Bring in your idle items, and we'll pay you cash on the spot,'" he said on the phone. "Customers come for convenience, sustainability, and the treasure-hunt experience. That's what makes the stores the driver. For e-commerce, if the average order value is high enough to generate profit for franchisees, then it can be a nice multichannel supplement. It's just not a major part of the business given the value proposition we focus on, though it exists and is growing."

Among the company's retailers, music store Music Go Round, clothing store Style Encore, and sporting goods store Play It Again Sports offer online sales. "Average order values are high enough that online sales are profitable," Heffes said. "In our music brands, the average online order exceeds $250. So it makes sense to go through all the necessary steps and processes to make money."

The risks of outsourcing

Peterson warned that if selling secondhand items disrupts retailers' operations or jeopardizes profits, it could in turn harm the long-term success of resale and the benefits it offers retailers, customers, or the planet.

"Resale is clearly trendy, but it's also a tough problem," he said. "Companies that have operated like Henry Ford for the past 40 years won't solve it themselves. So they'll outsource it. My concern with online resale and outsourcing is that it's labor-intensive, they'll lose money, and then they'll give up."

Instead, Peterson believes retailers and brands need to deeply explore how to make this emerging market work, most likely through physical stores or a combination of online and offline.

"Resale is clearly trendy, but it's also a tough problem. Companies that have operated like Henry Ford for the past 40 years won't solve it themselves. So they'll outsource it."

—Lee Peterson, Executive Vice President of Thought Leadership and Marketing at WD Partners

J. Crew is one brand taking a different approach. The retailer partners with ThredUp to receive and sell secondhand items online, while also having a team curate items for its J. Crew Vintage program, sold in select stores. The retailer recently collected vintage J. Crew turtlenecks and trench coats, which quickly sold out, and has now assembled a spring tweed jacket collection.

"All jackets are vintage and sourced and curated by J.Crew designers," a spokesperson said in an email. "ThredUp is not involved in any sales of these styles."

But brands' piecemeal approaches can create friction. For example, unlike easily browsing all items in-store, according to Trove's report, only 13% of brands integrate online search for new and used items, 25% allow customers to combine purchases of new and used items, and 19% support mobile shoppers viewing secondhand items they added to their cart on desktop.

Peterson, who has worked with IKEA to explore the challenges and benefits of resale, believes success requires the kind of commitment IKEA has shown. After piloting resale in dozens of U.S. stores in 2021, the furniture retailer recently launched its "As-is" service, where customers can reserve secondhand items and pick them up in-store.

"It has to become part of your culture," he said. "You have to close on Black Friday like REI does. You have to show everyone: 'We want to go outdoors. We love the outdoors. So we're closed that day.' I think IKEA is the same way. They're just going to do it. They're deeply committed to the circular economy, almost to the point of obsession. So they'll definitely find a way."