Re-commerce – journey to circular fashion – value drivers & challenges

Circular%20fashionNeed for change

Sustainability has become a major trend in the fashion industry. Driven by consumers alerting the world that the current form of production is not viable. Accelerating consumption of raw material, increasing pollution and out of control waste are forcing us all to rethink our current consumption patterns and pushes the case for re-use of material as part of a circular economy.

Progress is being made however it is slow and a real shift in consumer and industry behavior is urgently needed.

Examples of apparel companies starting to pilot take-back programs for worn clothes or moving to materials and production methods that have a less lasting impact on the environment can be seen around us.

Consumer sentiment is mostly driving this change in behavior as they become more and more aware of the increasing impact of their behavior on the future of our planet.

The fact that global fashion product has more than doubled in the past 15 years and that this trend is not slowing down should be a clear indication that the fashion industry the way it currently operates is unsustainable.

Besides the push from consumers and, the policies that governments are putting into place there is also a very valid business case for circularity in fashion.

Circular business models have shown to reduce environmental impact while at the same time fulfil the consumer demand for sustainable fashion.

So far established brands have been hesitant to adopt large scale re-commerce due to

the perceived risk of cannibalization, the operational complexity of new models and uncertainty on the financial viability.

In this blog we will be looking at challenges and benefits of specifically for re-commerce in fashion.

Value drivers for re-commerce

The resale market is growing 4x faster that the luxury brand market. Most of this grow and the profit is contributed to peer to peer (P2P) online players. Luxury products have demonstrated to have more value after their first sales and brand owners starting to tap into that additional value that the full lifecycle of their products produce by changing their business model from “make and sell” to a more circular business model such as re-commerce.

Besides the obvious benefit of incremental profit from ‘pre-owned” product sales it also helps brands to:

  • attract a desired younger demographic at a lower customer acquisition cost,
  • increase frequency and loyalty and thus contribute to overall customer lifetime value (CLTV) expansion
  • accessing secondary market consumer data
  • reinforces the brand commit to sustainability

Let’s look closer at some of these benefits to understand which would be applicable to the different brands as re-commerce is not a one size fits all.

Currently branded pre-owned products are sold profitable across peer-to-peer channels. Brands can increase their profit by taking ownership of the recommence market for their products. Brands are in a unique position to tap into this growing profitable market segment by starting their own re-commerce business and make pre-owned sales part of their business, capturing additional revenue, tapping into a new customer segment, and strengthening their relationships with their customers.

The value a customer contributes to a brand (CLTV) will increase if a brand can drive recurring revenue with that customer and extend the duration a customer interacts with the brand. When it comes to re-commerce this requires a careful blending of new and pre-owned product thru a variety of sales channels.

Delivering a unique experience where you customers can buy new, buy pre-owned, and trade-in pre-owned in a convenient and trusted way is key to be successful.

The recommence model is also great way to tap into a new customer segment and extending a brand to customers that previously only bought brand products through the peer-to-peer channels. Recommence will help reduce customer acquisition cost by talking ownership of the pre-owned sales of brand products enabling brands to directly engage with shoppers who are looking for pre-owned products from a trusted source.

Consumers increasingly want brands that embrace purpose and sustainability and are more likely to purchase sustainable products. The foundation of recommence is the concept of the circular economy — an economic system that is Recommence in fashion is aimed at eliminating waste and driving the continual use of resources, it actively contributes to reducing the water pollution, lower carbon emissions, and less waste.

Recommence provides the brands with a new way to interact and provide value to their customers by offering them a seamless and secure way to sell their preloved products at a fair price. The trade-in channel will improve customer stickiness with the brand, drive repeat purchases, increase overall customer satisfaction, and provides the brand with valuable insights in after sales customer behavior.

 

Hurdles for re-commerce

There are significant hurdles to adoption. These include the complexity and operational risk of circular models and a lack of clear evidence on long-term financial viability. These barriers are particularly relevant for established brands currently operating a successful linear model, with many uncertain about how to best implement a new circular economy approach.

Recommence requires a different warehouse / distribution center operation compared to new products. The operational side of the recommence process is complex and labor intensive. Brands will need to ensure they can manage the re-commerce logistics operations in a cost-effective way. One way to reduce the complexity for the brand in this area is to outsource the operation however this could result in limited visibility and reduced agility to react quickly to changing demands.

Re-commerce will need a suitable inventory management strategy to control the inventory carrying cost of preloved items. Being able to dynamically adjust the price a brand pays for a trade-in based on current inventory and expected demand are crucial as is promoting of slow-moving preloved items to ensure they don’t end up clogging the re-commerce warehouses and negative affecting the brands balance sheet.

For a more in-depth discussion on how SAP can help you on your re-commerce journey, feel free to reach out to me.

Rob Delnoij

Innovation Adviser

SAP Asia Pacific & Japan

rob.delnoij@sap.com