Welcome to the latest sustainability column that takes a look at what retailing is doing to address the issues in its industry. Much of the ongoing focus will be on fashion but not exclusively.
This month’s column takes a look at how a Dutch auction-style company operating in South America is attempting to transform the way in which unwanted/donated clothing is sold.
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In the 17th century the Dutch invented a completely new way of selling, which is consequently known as a Dutch auction. Instead of bidding starting low and working its way up, allowing the bidders to make educated guesses about who is keen to buy and what their bid limit might be, the price starts high and reduces incrementally until the price is right for someone – the winning bidder usually has less idea if they have overpaid for the item as they have no inkling on when anyone else would have started bidding, but they do have the satisfaction of knowing that they have paid their best price and not overpaid for their own budget.
For sellers this style has the benefit of shifting a much higher ratio of goods with much less stock left over as there is usually a price low enough to attract at least one consumer and everyone loves a bargain. And it is particularly suited to the world of the second-hand outlet where a rack will be full of completely individual items rather shelves full of the same item in different sizes and colours as in usual retail. There is no value in waiting for the coming discounts to pile up before purchasing as the consumer risks losing the one and only piece of that particular item.
Of course we are all familiar with the idea of general sales and discounted prices (even within second hand or charity shops) but the Dutch auction can be a very precise mechanism. And it is one which the huge South American-based company Megapaca is using innovatively alongside technology not normally associated with the second-hand sector to efficiently monetise the selling of thousands and thousands of tons of imported second hand clothing from the US.
In fact, they are doing it so well within their home markets of Guatemala, Honduras and Mexico that they are about to begin selling unwanted US clothing online (having been spruced up and cleaned) right back to the Americans with the recent opening of the Megapaca website in September. The told Bloomberg that stores would definitely follow – tapping into the huge Latino ex-pat community in the US that already knows the brand well.
So how can a company generate $200m on second hand clothing when others make it seem so hard? Well, firstly Mario Pena, co-founder of Megapaca, is happy to invest in the kind of cutting edge tech more usually associated with retailers selling first-hand. There is no hint that second hand deserves any less care or attention than buying something new. The IT department connects inventory management from warehouses to stores and the website. The QR codes on the clothing label provides management with real-time data on exactly who is buying, where they are buying and how much they are paying.
The last part of the sorting process is pricing – and these employees have a touchscreen and can access categories with algorithmically-calculated prices. The same label also contains information on where the garment came from – this opens up the possibility of Megapaca being able to pinpoint exactly where it’s most lucrative supplies come from. A kind of reverse process where the charity shop targets the wanted donors whose stuff sells the best.
Secondly, the labour market is cheap in South America. This helps with the sorting of goods. The thousands of expert sorters have 26 clothing categories to choose from as the items are sifted through finer and finer filters. There is also a production line of workers solely washing shoes.
And then, of course, there is the Dutch auction. Clearly signposted via coloured dots on the clothing and large signs in-store to let shoppers know what level of discount the item has reached based on the colour of the dot, it takes a month for an item to reach half price (in contrast to the traditional sales process in the UK, which occurs at prescribed end-of-season times and often goes to 50% immediately). The highest level of discount Megapaca uses is 90% and the company claims to work its way through 80% of its vast inventory through this method. The final 20% of goods, which simply do not sell are sent straight back to the distribution centres and sold to wholesalers who operate in more rural areas. It all gets sold in the end.
No-one would pretend that Megapaca is particularly trying to be a sustainable company – it does however have lessons for any operators selling second hand clothing because although it does not address the chronic throwaway culture in the US (in fact it relies on it to replenish its stores) it does repurpose the spoils of that culture in a supremely efficient way. Not afraid to use high-tech to sell low-value items it is proving very adept in proving that old phrase: where there’s muck there’s brass. There is much to be learnt from its model.
Glynn Davis, editor, Retail Insider