Major global fashion brands are currently facing billions of dollars worth of unsold inventory. To mitigate market cannibalization, these brands typically refrain from reselling in primary markets such as the U.K. and the U.S. In contrast, emerging markets like Africa rely significantly on secondhand clothing imports; however, 30% to 40% of these garments are classified as unusable upon reaching their destination, contributing to environmental damage through discarded textiles.
This scenario presents a striking contradiction: A surplus of new, unsold stock in developed markets exists alongside the ecological challenges induced by secondhand imports in developing regions. Nonetheless, this tension also paves the way for innovative opportunities within the global resale market, commonly referred to as recommerce, which is anticipated to reach approximately $350 billion by 2027.
Seizing this market gap is FARO, a South African startup that emerged last year and has recently secured $6 million in funding to advance its mission of making fashion affordable while addressing textile waste throughout Africa.
Capitalising on excess inventory in emerging markets
The model operates as follows: African retailers do not have the economic capability to sustain full-price outlets for brands such as Calvin Klein, Tommy Hilfiger, and Zara. However, there remains a strong demand for authentic products across the continent. FARO enables this surplus stock from these brands to find a second life in South Africa, where it is highly sought after, thereby generating value for both markets and minimizing waste.
FARO’s strategy focuses on consumer returns with minor defects that brands routinely discard or incinerate due to excessive labour costs, as noted by co-founder and co-CEO David Torr. The company collects these items and refurbishes them using its facilities, which are outfitted with industrial wash systems, steam tunnels, and cost-effective labour. This method not only reduces waste but also enables the startup to acquire inventory at exceptionally low prices, sometimes as little as £1 per item, and resell it following value-added enhancements.
Torr highlights that the business operates on a fixed-margin approach aiming for a 45% margin after accounting for all expenses, including swing tags and processing fees. He further explains that rather than inflating profits when margins exceed expectations, FARO reinvests in improved pricing for its customers.
Presently, FARO operates four stores, with ambitious plans to expand to 1,000 locations within the next decade. Its inventory consists of approximately 40% refurbished returns and 60% overstock products. FARO collaborates with major brands including ASOS, Boohoo, G-Star, Jack & Jones, and Levi’s to source these clothing items, providing discounts of up to 70% off retail prices.
The co-founder expressed that their core belief is to be the most exciting provider of great value to customers, stating that prioritising customer satisfaction and loyalty is central to achieving their goal of 1,000 stores.
Unlike other regions in Africa, South Africa’s retail market is significantly advanced, featuring over 2,000 shopping centres, thus serving as an ideal setting for physical off-price retail distribution. This approach is critical since off-price inventory, typically characterised by unique consumer returns, is often too costly to list digitally online.
Even large off-price retailers like TJX mainly operate offline, leveraging established supplier relationships and profitable legacy systems that resist innovation. However, the inefficiencies within these systems are becoming increasingly evident, as inventory management still relies on outdated, labor-intensive methods, with planners managing extensive manifests in Excel manually.
Torr mentioned that FARO is developing AI-driven agents designed to simplify these intricate buyer workflows into digestible micro-tasks, thereby enhancing operational efficiency.
He elaborated that substantial brands often employ over 15,000 individuals at the head office merely to manipulate data within Excel. By leveraging AI capabilities, FARO has created an AI agent that can perform these tasks in seconds with significantly greater accuracy than human operators.
FARO also plans to incorporate personalised shopping features. For instance, customers with specific brand or item interests could receive alerts when similar products are expected to arrive at nearby stores, enriching the overall shopping experience.
If successful, this could serve as a notable competitive edge. E-commerce in Africa faces various obstacles, such as logistical difficulties and population distribution, leading to expensive delivery models. While platforms like Takealot and Jumia have remained strong over the years, the emergence of ultra-affordable, fashionable platforms like Temu poses challenges not just to their dominance but also to fast-fashion brands operating in South Africa that cater to the budget-conscious consumer segment.
Path to 1,000 stores
By completely avoiding e-commerce to enhance its internal operations and partner supply chains, and by focusing on aspirational buyers who appreciate branded products for their status and perceived quality, FARO is carving its niche, according to Torr.
FARO initiated 2023 with a trial pop-up store in South Africa, generating $100,000 in its inaugural month. The company originally projected that it would require seven stores to achieve $2 million in annual revenue, based on conventional retail benchmarks.
Contrarily, FARO, which operates in urban centers, mid-market sites, and formal retail environments, reached that target of $2.3 million with just four stores, demonstrating a remarkable 20x revenue growth in the previous year. The startup now aims to quintuple its growth this year, as outlined by CEO David Torr.
Regarding its ambition to expand to 1,000 stores, this will depend on how effectively FARO develops localized pricing profiles that reflect regional demand and the specific brands available, as they consider expansion into additional emerging markets. Consumer preferences vary significantly by region; what thrives in South Africa may not resonate as well in Kenya or Nigeria.
Torr co-founded FARO with three partners: Will McCarren, Chris Makhanya, and Amber Penney-Young, who together possess experience from companies like Amazon, Jumia, UCOOK, Superbalist, Spice & Roots, and Zumi.
The investment was led by JP Zammitt, president of Bloomberg, and included VC firms such as Presight Capital and Garage Ventures, along with individual investors like Mato Perić (MPGI), Leonard Stiegeler (Pulse), Oliver Merkel (Flink), Vikram Chopra (Cars24), Tushar Ahluwalia (Razor Group), and Daniel Funk, managing director of Thiel Capital.
