Fast-growing South African firm FARO raises $6 million to source, refurbish and sell surplus clothing

Global fashion brands grapple with excess inventory. ASOS, for example, has more than £1.2 billion of unsold products in 2022. Mostly, these brands avoid reselling in core markets such as the UK and the US to prevent the market cannibalization. Meanwhile, emerging markets such as Africa rely heavily on second-hand clothing imports, but 30% to 40% of these items are deemed unusable upon arrival, leading to environmental degradation due to discarded textiles.

The situation highlights a paradox: a surplus of new, unsold inventory in developed markets coexists with the ecological damage caused by second-hand imports in emerging markets. But this dynamic also creates unique arbitrage opportunities for startups in the global resale market – also known as recommercial – which is poised to reach around $350 billion by 2027.

Try to seize this opportunity I WILLa South African upstart that came on the scene last year and recently raised $6 million to pursue its vision of making fashion accessible while fighting textile waste across Africa.

Sell ​​excess inventory in emerging markets

Here’s how it works: African markets lack the economic capacity to support full-price retail stores for brands like Calvin Klein, Tommy Hilfiger and Zara. However, the desire for authentic products on the continent persists. FARO ensures that excess stock from these brands gets a second life in South Africa, where they are in high demand, creating value for both markets and reducing waste.

The recommerce startup targets consumer returns with minor defects that brands often discard or incinerate because of high labor costs, co-founder and co-CEO David Torr tells TechCrunch. FARO collects these items and restores them using its facilities equipped with industrial laundries, steam tunnels, and affordable labor. This approach prevents rejection while allowing startups to buy inventory at ultra-low prices – sometimes less than £1 per piece – and resell it after the valuation processes.

Torr explains that the business operates on a fixed margin model that aims for 45% after all costs, including swing tags and processing. It also says that instead of inflating profits when margins exceed targets, FARO invests in better pricing for its customers.

Currently, FARO has four stores with ambitious plans to scale to 1,000 locations in the next decade. Their inventory comprises approximately 40% refurbished returns and 60% overstock items. FARO supplies these clothing items through partnerships with major brands such as ASOS, Boohoo, G-Star, Jack & Jones, and Levi’s, offering some at discounts of up to 70% off retail prices.

“Our fundamental belief is if we can be the most exciting engine of great value for the customer, that’s how we create loyalty and stickiness, and how we only get to 1,000 stores is by being 100% focused on the customer’s center,” he says tower .

The South African retail market, unlike the rest of Africa, is very developed, with more than 2,000 shopping centers, making it a prime location for off-price physical distribution. This approach is essential since off-price inventory—often the consumer returns with unique, one-of-a-kind pieces—is too expensive to digitize and list online.

Even massive off-price retailers like TJX operate primarily offline, relying on established supplier relationships and profitable legacy systems that leave little incentive to innovate. However, the inefficiencies in these systems are becoming more and more apparent, as inventory management is still based on outdated, labor-intensive processes, with planners manually handling massive manifests in Excel.

Torr says FARO is developing AI-powered agents designed to break down these complex buyer workflows into manageable micro-tasks, thereby simplifying operations.

“Some brands have more than 15,000 people employed at the headquarters level who are just manipulating data in Excel,” he says. “If you look at what AI can do, you can build an AI agent for it, and that’s what we’ve done. We’ve started to implement our first purchasing models that could do that – not in a matter of hours, in a matter of seconds. And its accuracy will be infinitely better than the human being would otherwise do so.”

According to Torr, the startup also plans to add custom shopping tools. For example, customers interested in specific brands or items could be notified when similar products are about to arrive in one of their stores, enhancing the shopping experience.

It could be a significant differentiator if it works. E-commerce continues to face obstacles in Africa due to logistical challenges and population density, making delivery models costly. While platforms like Take away and Jumia have held their own for years, the rise of ultra-affordable and trendy platforms like Temu threatens not only their dominance, but also that of fast fashion brands operating in South Africa that appeal to discerning consumers at the price of the continent.

Road to a thousand stores

By eschewing e-commerce entirely to instead optimize its internal operations and partner supply chains, and targeting aspiring buyers who value branded products for their status and perceived quality, FARO is finding its niche, he says tower

FARO started 2023 with an experimental pop-up store in South Africa, generating $100,000 in its first month. Initially, the company expected to need seven stores to hit $2 million in annual revenue, based on traditional retail benchmarks.

Instead, FARO, which operates in urban centers, middle market centers, and formal sales areas, says that it reached that step – $2.3 million – with only four stores, achieving a 20x revenue growth last year Now, the recommerce startup aims to grow fivefold this year, according to CEO David Torr.

As for its plans to scale to 1,000 stores, these depend on the effective way to build localized price profiles adapted to regional demand and the specific brands available while looking at the expansion in other emerging markets. Consumer behavior and preferences are not universal and can vary significantly between regions. A strategy that thrives in South Africa may not resonate in Kenya or Nigeria.

Torr launched FARO with three other co-founders: Will McCareen, Chris Makanya, and Amber Penney-Young, who collectively bring experience from Amazon, UCook, Lelive, Jumia, Rocket Internet, and Zumi.

JP Zammitt, president of Bloomberg, led its new pre-seed round. VC firms such as Presight Capital, Garage Ventures and individual investors including Mato Perić (MPGI), Leonard Stiegeler (Pulse), Oliver Merkel (Flink), Vikram Chopra (Cars24), Tushar Ahluwalia (Razor Group), and Daniel Funk, the general manager. of Thiel Capital, participated.